The first essay (chapter 2) examines the impact of major U.S. natural disasters on the stock returns and volatilities of firms based in disaster areas. We find that a small proportion of catastrophes (between six and eight percent) have a significant impact on returns, after controlling for false discoveries. The meaningful shocks are distributed over a relatively long period of time with the uttermost effects being felt in the two or three months following disasters. Furthermore, we observe that the second moments of returns of affected firms more than double when hurricanes, floods, winter storms and episodes of extreme temperature occur.

The second essay (chapter 3) studies the effect of major floods on new municipal bond issues marketed by U.S. counties. The results show that bonds sold in the midst of floods exhibit yields about seven percent higher than bonds sold at other times, which is a net loss of almost $100,000 in terms of proceeds on a $10 million debt issue. Consistent with a behavioral explanation based on the availability bias, the abnormal yields rapidly decay over time and are limited to first-time disaster counties. The evidence for an increase in credit risk is mixed and the results do not support lower market liquidity stories. Selection bias, underpricing activities and issuance costs are examined and are unlikely to materially affect the conclusions.

The final essay (chapter 4) focuses on the consequences of disasters on investor risk preferences. We infer the impact of major catastrophes on the risk-taking behavior of investors from a database of U.S. municipal bond transactions. As the effect of disasters is mostly regional, we exploit the geographic segmentation of the municipal bond market to estimate a measure of regional risk aversion using a conventional consumption capital asset pricing model. The findings strongly support the assumption that natural disasters cause a statistically and economically significant increase in financial risk aversion at the local level.