Wildfire cashflow shocks

This paper studies the impact on cashflows and financial decisions of firms affected by wildfires, focusing on the wildfires that occurred in Portugal in 2017. Using establishment-level data from the hotel industry combined with geospatial information on wildfire proximity and land use, we employ a difference-in-differences approach to study both directly and indirectly affected firms. Our findings reveal that firms with direct damages from the wildfires recorded, on average, a 43% drop in revenues in 2018, while indirectly affected firms with a high share of burned area within a 1 km radius suffered a 24% drop. These cashflow shocks triggered distinct financial responses: directly affected hotels increased their reliance on long-term debt and coupled tangible asset investments with additional cash reserves, whereas indirectly affected firms reduced tangible investments and cash holdings. This divergence aligns with both real-options and reference-dependent risk preferences theories, reflecting the option to wait before investing and the shift in business fundamentals relative to the pre-disaster reference points.