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HomePaperStormy Investments: Navigating Preferences and Barriers in Weather Disasters

Stormy Investments: Navigating Preferences and Barriers in Weather Disasters

17 February 2024
Authors: Rob Bauer (Maastricht University), Dirk Broeders (Maastricht University/De Nederlandsche Bank) and Flavio De Carolis (Maastricht University/De Nederlandsche Bank)
Presenter: Flavio De Carolis (Maastricht University/De Nederlandsche Bank)
Abstract:

In this event study, we exploit Geographic Information Systems (GIS) to show that weather-related disasters negatively surprise equity investors under informational frictions. We determine the exposure of firms to weather-related disasters by overlaying the locations of production facilities with geographic regions affected by hazards. We complement this data with firms’ financial information, the ownership structure of the facilities, investors’ ownership of companies, and disasters’ vulnerability on a facility level. For winter windstorms, we find a negative cumulative average risk-adjusted abnormal daily return of 99 basis points at the event date. Furthermore, if the firm’s impacted facility is located abroad with respect to the firm’s headquarters, the negative impact on stock returns reaches up to 139 basis points. The magnitude of the negative surprise is reduced in two cases: i) when the impacted facilities are located in the home country of the publicly listed firm’s headquarters ; ii) for those companies whose institutional investors’ base features home equity investment preference. We base our findings on a sample of 600 unique companies, 1,748 facilities, 68 floods, 16 winter storms, and 2,332 wildfires from 2014 to 2021. Our results are statistically and economically significant for investors.

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