We investigate how immense natural disasters affect firm search behavior. Unlike prior research that emphasizes aspiration gaps as a firm-level determinant of exploration and exploitation, we suggest that immense natural disasters are a macro-level factor that affects firm search orientation by altering risk preference independently of aspiration gaps. Specifically, we argue that immense natural disasters render individuals who are involved in firm decision making more risk averse, thereby leading firms to decrease exploration, which entails less certain returns. We also claim that this decrease in exploration weakens as more shares of the firm are owned by foreign institutional investors who were not afflicted with the disaster and thus did not experience a change in risk preference. We test our hypotheses by using the Great East Japan Earthquake as a natural experiment.
