Firm Age and Size and the Financial Management of Infrequent Shocks

Age and size distinctly affect firms’ financial management of infrequent risks. We examine a rare, severe event using detailed firm-level data collected following Hurricane Sandy in the New York area. Our results follow recent contributions from dynamic risk management theory, namely that larger firms are more likely to insure and to use credit after a shock. We build on this theory, showing tradeoffs between managing frequent versus infrequent risks: young firms, exposed to many risks, do not insure against infrequent events and are ex post credit constrained. Consequently, younger firms and smaller firms disproportionately bore the costs of the shock.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.