When Rain Matters! Investment Timing and Value Relevance

Abstract

We study whether firms in the rain-sensitive sectors time their investments to generate value in response to extreme deviations in rainfall conditions. Using Indian monsoon data, we show that the market-based valuations of rain-sensitive firms significantly declines in the immediate aftermath of extreme rainfall deviations. In terms of the cross-sectional variance of the extreme rainfall conditions and consistent with investment timing economic argument, our investigations show that when compared to normal rainfall conditions, affected rain-sensitive firms tend to significantly increase their investments following excess rainfall periods. Contrarily, we observe shrinkage of investments following deficit rainfall periods. However, in both cases, firms seem to regain the lost market-based values in the lead periods of extreme rainfall deviations.

Keywords: Abnormal Rainfall, Firm Value, Investment Timing, Capital Expenditure

JEL Classification: G30, G32, Q540, Q510