Extreme Rainfall and Institutional Investor Behavior

Abstract

We investigate institutional investor behavior and firm valuation surrounding extreme rainfall conditions in rain-sensitive firms. Using Indian monsoon data and exploiting extreme rainfall conditions as ongoing natural experiments, we show that institutional investors significantly increase (decrease) their ownership in rain-sensitive firms during the excess (deficit) rainfall years. Despite the extreme rainfall conditions we show that institutional investors gain from investing in rain-sensitive firms during excess periods, as those firms have superior financial performance in the following period. Further analysis shows that although both domestic and foreign institutional investors increase their ownership in rain-sensitive firms following excess rainfall periods, only domestic institutional investors significantly divest from rain-sensitive firms in deficit periods. Our results support the view that extreme climate conditions can impact firm value and change investor behavior.