The Impact of Floods on Firm Performance and Relocation

Effects of floods on firm survival, sales, and relocation 

Non-Technical Summary

Climate change is expected to increase the frequency and intensity of floods and has already started to generate sizable economic damage. However, the impact of floods on firms is only partially documented. In particular, while some contributions provide evidence of their effects on firm performance, less is known regarding flood effects on firms’ relocation.

This paper documents simultaneously the effects of flood on firms’ survival, financial ratios, and location. It combines extensive firm-level financial information data for companies with more than 750,000 EUR of annual sales, with their precise location and administrative data on natural disasters at the municipality level, for the period 2004-2024 in France.

Using local projections to account for dynamic effects, and focusing on single-establishment firms, we observe persistent negative effects of floods on firm performance. First, firms located in flooded municipalities are less likely to survive: 5 years after a flood, their exit rate is 2% higher. Second, surviving firms have lower economic performance: 5 years after a flood, their sales are 8% lower. Negative effects are also observed for their number of employees, staff costs, EBITDA, and investment. Finally, firms adapt to floods by relocating: 5 years after a flood, they are 4% more likely to have changed of location. Most of this effect can be explained by firms relocating to other municipalities, and, among them, by firms relocating to municipalities with a lower level of risk – as measured by the number of floods in the previous 20 years or by the altitude of the municipality. Firms that relocate tend to change urban area, but not employment area – i.e. broader zones where residents both live and work –  suggesting they avoid receding from their local labour market and economic environment. However, the effects on survival and sales are not markedly different between firms that relocate and those that do not, suggesting that the costs of moving offset the benefits of pulling away from floods.

The effects are markedly stronger for intense events, as proxied by higher duration (floods lasting at least one week) or frequency (floods occurring more than once a year). Direct effects also appear stronger than indirect ones: firms located in 1-in-100 year floodplains – where productive capital is more likely to be destroyed or impaired – face more negative effects than firms outside, which are more likely to be indirectly affected through disruptions to local economic activity. In particular, directly affected firms face negative effects on their long term assets and are markedly more likely to relocate. Finally, we also find negative indirect effects on firms of floods occurring in neighbouring municipalities, although these effects decay with distance. The results are robust to a wide variety of alternative specifications, and also hold for multi-establishments firms.

Policymakers are increasingly aware of the rising costs associated to floods, and emphasize that firms’ adaptation will be key to their resilience. While we confirm the significant adverse impact of floods, we also find that firms respond to floods by relocating to less risky areas, which constitutes a form of adaptation strategy. However, because firms chose to remain within their local market, they tend to relocate nearby, where they may still suffer from negative spillover effects. This suggests relocation might not be a sufficient strategy and should be complemented by additional adaptation measures.

Keywords: Firm Performance, Floods, Natural Disasters, Location Decision
Codes JEL : L20, Q54, G30, D22