This paper analyses impacts of flood events on European manufacturing firms. Combining a highly granular identification strategy with the Local Projections Difference-in-Difference approach, we estimate firms’ dynamic average treatment responses to flood exposure. We find that flood-affected firms experience a 7% reduction in tangible assets two years after the flood compared to non-affected control firms, as well as a decline in firm output, productivity and profitability. However, those effects decline and are not significant after four years, as firms recover and replace damaged asset by newer, more productive technologies. More importantly, we find that increased credit constraint lead flood-affected firms to draw on cash reserve and resort to equity injections to compensate for restricted access to credit. More severe floods exert a stronger and more prolonged effect on firms’ productive physical capital and liquidity. Finally, while financially stable firms become more productive and profitable due to damaged assets replacement, distressed firms face significant constraints in leveraging financing to support recovery, leading to long-lasting flood effect. Overall, we find that floods impact firm-level financial performance on the short-term but are insignificant on the long-term. However, under financial stress, floods have the potential to persistently erode firms’ balance sheet.
