Panic Selling When Disaster Strikes: Evidence in the Bond and Stock Markets

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, although their fundamentals weakened following disasters. The evidence suggests that corporate investment in improving environmental profiles pays off when climate change risk is materialized.

This paper was accepted by Colin Mayer, Special Section of Management Science on Business and Climate Change.

Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.4018.