Hail-caused physical damage on cotton often occurs at squaring in Yellow River basin. Cotton is characterized as indeterminate growth habit as well as great compensatory ability. It is very important to determine the recovery potential after physical damage. A two-year (2014-2015) field experiment was carried out at Linqing of Shandong province with six treatments at five days after squaring, including removal of main-stem terminal and total leaves, RTL; removal of main-stem terminal but one leaf maintained, RT+1LM; removal of main-stem terminal but total leaves maintained, RT+ALM; main-stem terminal maintained but removal of total leaves, TM+RL; main-stem terminal and one leaf maintained, TM+1LM; and non-damaged, CK. A randomized blocks design was used for the study. Results showed that dry weight of single plant in RTL, RT+1LM, RT+ALM and TM+RL was significantly reduced at 15-60 days after treatment (DAT) as compared with that of CK. Dry weight of single plant in TM+1LM was reduced by 59.0% and 12.1% at 15 and 30 DAT, respectively, and slightly reduced at 45 and 60 DAT. LAI dynamics of six treatments were similar to those of biomass from 15 to 60 DAT. The leaf net photosynthetic rate of RTL, RT+1LM, RT+ALM and TM+RL was lower than that of control from 15 to 45 DAT, and the peak occurrence of Pn was delayed, while the Pn of TM+1LM and its peak period were similar to that of CK. Total biomass TM+RL was reduced by 18.2% in, but not changed in RTL, RT+1LM, RT+ALM, and TM+1LM compared with that of CK. Ratio of seedcotton to stalk of RTL, RT+1LM, RT+ALM, and TM+RL was decreased by 52.6%, 47.3%, 36.8%, and 23.7% compared with that of CK, but not significantly changes in TM+1LM. The number of bolls per unit land area in RTL, RT+1LM, RT+ALM, and TM+RL decreased by 19%, 7.2%, 9.9%, and 15.6%, boll weight decreased by 23.2%, 8.9%, 8.9%, and 19.6%, and thus seedcotton yield decreased by 36.3%, 17.5%, 15.5%, and 31.9%, respectively. However, TM+1LM did not significantly reduce the number of bolls and boll weight, and produced comparable yield to CK. The results of this study indicate that cotton plants have strong compensation effects on biological yield and economic yield owing to the indeterminate growth habit after physical damage at squaring stage, but the compensatory effects are varied by the extent of physical damage. Accordingly, the physical injury at squaring was divided into light injury (TM+1LM), moderate injury (RT+1LM, RT+ALM), and severe injury (RTL, TM+RL), in which the yield reduction was less than 5%, 15%, and more than 30%, respectively. For lightly and moderately damaged cotton fields, water and fertilizer management is strongly recommended to promote cotton compensatory growth and reduce yield losses, while for seriously damaged cotton fields, replanting other short-season crops could be considered.