Risk and the Multinational Corporation Revisited: The Case of Natural Disasters and Corporate Cash Holdings

Abstract

•Natural disasters are major causes of uncertainty. Based on traditional international business and finance theories, we re-examine the relationship between risk and internationalization. We find evidence that diversification helps reduce risk. •We introduce natural disasters to mainstream international finance as a risk factor and show several important findings: firms hoard cash after a natural disaster. Unlike their domestic counterparts, MNCs increase their cash holdings to a lower degree when faced with a disaster. The effect of disaster damage is persistent over time. Finally, disaster damage is not relevant in poor countries. •Firms appear to have a rational reaction to disasters: corporate cash levels are lower in countries with high insurance consumption. Firms hold more cash in countries with greater exposure to natural disasters, but they tend to lower cash holdings in countries with good disaster preparedness programs and/or high insurance consumption. •Our results have important implications for policy makers and academics. Cash hoarding after a disaster, while rational at the firm level could be detrimental for economic recovery. Our study suggests tools for policy makers to control it.