Natural selection: firm performance following a catastrophic earthquake

The Canterbury (New Zealand) earthquakes in September 2010 and February 2011 caused major upheaval to the region. The second quake killed 185 people, forced many from their homes, and led to a prolonged closure of the central business district of the region’s largest city, Christchurch. We examine the consequential effects on business in the region, paying particular attention to heterogeneity in firm-level outcomes. This examination provides insights into factors that underlie firm resilience in the aftermath of a shock. We quantify substantial variation in firm outcomes by industry and by location. In addition, we show that firms’ prior financial viability heavily influenced their chance of survival. Conditional on continuing to operate, average profitability returned to pre-quake levels quickly. Taken together, these effects support economic models in which firm exit is driven by selection on profitability and in which shocks are part of the process of creative destruction in which the strongest firms survive.