When rain matters! Investments and value relevance

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 73; p. 101827
• Main Authors: Rao, Sandeep, Koirala, Santosh, Thapa, Chandra, Neupane, Suman
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.04.2022
• Subjects: Abnormal rainfall; Climate change; Firm value; Investment strategy; Salience theory; Climate change; Q54; Abnormal rainfall; Firm value; G30; Salience theory; Investment strategy; G32; Q51; D81
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2020.101827

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. •Market-based valuations of rain-sensitive firms decline significantly in the immediate aftermath of extreme rainfall deviations.•Rain-sensitive firms tend to significantly increase (decrease) their investments following the experience of excess (deficit) rainfall.•All rain-sensitive firms regain their lost market value following the investment strategies in the aftermath of both the extreme rainfall deviations.