Panic Selling When Disaster Strikes: Evidence in the Bond and Stock Markets
Management Science, Forthcoming
81 Pages Posted: 10 Mar 2021 Last revised: 22 Mar 2021
Date Written: January 16, 2021
Abstract
This study uses disaggregated establishment-level data to identify a firm’s exposure to physical climate risk and examines investors’ reaction to natural disasters in both the U.S. corporate bond and stock markets. We find that, when a firm is exposed to disasters, investors overreact by depressing the current bond and stock prices, causing future returns to be higher. However, firms with a strong environmental profile experience lower selling pressure on their bonds and stocks, even though their fundamentals weakened following disasters. The evidence suggests that corporate investment in improving environmental profiles pays off when climate change risk is materialized.
Keywords: Physical climate risk, natural disasters, overreaction, establishment-level data
JEL Classification: G10, G11, G40, G41, Q54
Suggested Citation: Suggested Citation