Taken by Storm: Business Financing, Survival, and Contagion in the Aftermath of Hurricane Katrina∗

We use hurricane Katrina’s damage to the Mississippi coast in 2005 as a natural experiment to study business survival in the aftermath of a capital-destruction shock. We find very high exit rates for businesses that incurred physical dam-age, particularly for small firms and less-productive establishments. Auxiliary evidence from the Survey of Business Owners suggests that the differential size effect is tied to the presence of financial constraints. In the long run, the cumu-lative effect of the storm was even larger, compounded by local demand exter-nalities due to the proximity of surviving businesses to damaged businesses that had exited. These forces explain why the most heavily damaged coastal areas of Mississippi had not recovered within five years despite significant help from both federal and state sources