Natural Catastrophes and Sovereign Bond Prices

Burkhard N Schrage
InSITE 2017  •  2017  •  pp. 201-225
Aim/Purpose: This study investigates effects of natural catastrophes on the cost of sovereign debt in developing countries and discusses MNC financing strategies.

Background: Over the last decades, natural disasters have increased in both number and severity. The combination of higher event frequency and intensity, coupled with fragile economic conditions in emerging market countries, may affect sovereign bond prices—particularly in developing countries—and consequently may have effects on the financing strategy of MNCs

Methodology: Parametric and non-parametric analyses and event study method.

Contribution: The current literature in International Business research has overlooked natural catastrophes as a source of heterogeneity across countries for investment decisions. We develop the theory and demonstrate empirically that both researchers and practitioners should take into account natural disasters when making internationalization decisions.

Findings: We find that natural disasters have a material impact on the bond returns issued by developing country governments and consequently on MNCs’ host-country financing costs.

Recommendations for Practitioners: Practitioners may consider the likelihood of natural disasters when making investment decisions in foreign countries.

Recommendation for Researchers: Researchers may consider including natural disasters when in internationalization research; our research adds in particular a new dimension to the location choice literature.

Impact on Society: Governments—in particular those in emerging markets—may rethink their strategies of how to “insure” themselves against natural disasters. Not being insured against these disasters result in negative secondary effects on economic development through higher cost of capital, and possible through lower FDI activities.

Future Research: Future research can be done. There are several avenues: using our insights and applying them to governmental reinsurance strategies would be a worthwhile topic. On a different level, one could also investigate further the contingencies of our findings and extend the theoretical framework towards developed markets.
natural disasters, location choice, multinational corporations, international strategy
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