Abstract
This research analyzes the BOVESPA stock market response to the worst drought occurred in the last 100 years in Brazil. For this purpose, we conducted a standard event study analysis in order to assess the financial response to such hydrological risk on a sample of seven Brazilian agri-food firms. We found statistically significant negative cumulative average abnormal returns (CAARs) around the drought official announcement for different event windows used. Particularly, the highest impact was obtained for the narrowest temporary window, five days around the event disclosure. Moreover, we also found the drought announcement affects even more negatively those companies that sell perishable products, five out of seven in our sample, versus those selling nonperishable ones by running a two-sample t-test on CAARs. This study brings awareness to the climate change impact into the emerging financial markets and the risk faced by shareholders when investing in the agri-food sector, not only in Brazil but also in other Latin American countries, due to the increasing probability to suffer from droughts.
Highlights
Climate change is one of the main risks we are facing worldwide
This study brings awareness to the climate change impact into the emerging financial markets and the risk faced by shareholders when investing in the agri-food sector, in Brazil and in other Latin American countries, due to the increasing probability to suffer from droughts
We examine how sensitive is the BOVESPA stock market to the worst drought occurred in the last 100 years in Brazil, analyzing the impact of the official announcement on
Summary
Climate change is one of the main risks we are facing worldwide. According to the Intergovernmental Panel on Climate Change [1] “Climate change refers to a change in the state of the climate that can be identified by changes in the mean and/or the variability of its properties and that persists for an extended period, typically decades or longer”. Bank (IDB, ), climate change includes changes in the variability of the weather, these are jointly represented as changes in the extremes of the weather, such as a greater number of rainfall events, bringing floods or droughts [3] To reinforce this idea, the [1] has pointed out that changes are already occurring in terms of frequency and severity of the hydrological events, and in their geographical location [4]. Most of the existing literature focuses on agriculture as the most sensitive economic sector to the correlated risks tied to natural disasters, but other sectors are affected, such as the financial one Such catastrophic events have led some microcredit providers to ration credit [19] or to restructure loans before they have occurred.
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