When rain matters! Investments and value relevance

Sandeep Rao, Santosh Koirala, Chandra Thapa, Suman Neupane

Research output: Contribution to journalArticlepeer-review

Abstract

We study whether firms, whose operational performance is highly sensitive to rainfall conditions (rain-sensitive firms), follow differential investment strategies to generate value in response to diverse extreme rainfall conditions. Using Indian monsoon data, we find that rain-sensitive firms suffer a significant decline in their market value in the immediate aftermath of excess and deficit rainfall conditions. Results show that the investment response by rain-sensitive firms depends on the saliency of extreme rainfall conditions. While excess rain-sensitive firms boost their investments following excess rainfall, deficit rain-sensitive firms shrink investments following deficit rainfall. However, these alternative investment strategies appear to be effective as both groups of affected firms experience positive growth in their market values following the differential investment strategies. Our results indicate that saliency theory can bridge the theoretical tensions between the real-options and risk-shifting theories resulting in differential corporate investment behavior in the face of two extreme rainfall conditions.
Original languageEnglish
Article number101827
Number of pages28
JournalJournal of Corporate Finance
Early online date8 Jan 2021
DOIs
Publication statusE-pub ahead of print - 8 Jan 2021

Keywords

  • climate change
  • abnormal rainfall
  • salience theory
  • investment strategy
  • firm value

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