Global Business and Finance Review • Fall 2011 • Pages 136-149 The Impact of Hurricanes on Investor Sentiment and Stock Market Returns Daniel Huerta and Daniel Perez-Liston * In this paper, we employ an event study methodology to examine the impact of hurricanes on investor sentiment and stock market returns. Our results show that there is a significant decrease in stock returns on the day hurricanes make landfall and one day prior. Additionally, we observe that not all industries are significantly impacted and that firms with large market capitalization are least impacted by hurricanes. Further, we find a significant increase in investor fear on the day of hurricane landfalls, and a significant decrease in investor sentiment during the week prior to landfalls. These results suggest that hurricanes and the anticipation of these storms have a negative and significant impact on both stock market returns and investor sentiment. I. Introduction Catastrophic events receive tremendous attention from the media and the general population. Media coverage of these events draws much interest from the public thus creating raised awareness of the situation at hand. Collimore, McCabe, Carleton, & Asmundsona (2008) find that extensive news coverage of disasters produces excessive levels of anxiety in individuals. As potential catastrophes, hurricanes cause much concern and uncertainty due to their destructive force and unpredictable path of destruction. But a question remains unanswered; do hurricanes and the anticipation of the economic losses they potentially produce affect sentiment amongst investors? Previous work finds that major disasters have a negative effect on stock market returns which is many times attributed to a negative change in investor mood (e.g., Worthington & Valadkhani, 2004; Kaplanski & Levy, 2010). In this article, we employ an event study methodology to examine the impact of hurricanes on investor sentiment and stock market returns. Specifically, we assess the impact of hurricanes on the returns of the New York Exchange (NYSE) composite index, the returns on ten portfolios constructed by size, and ten portfolios constructed by industry (Fama & French, 1992). We use these portfolios to test for any differential effects due to industry and market capitalization differences. Additionally, we analyze the effect of hurricanes on two constructed measures of investor sentiment. We employ a principal component analysis to create representative variables using both weekly and daily sentiment data. The results show that stock market returns are significantly negative on the day and the day before a hurricane makes landfall, with a non-significant reversal effect appearing on the third We are grateful for all the helpful comments from an anonymous referee, Biff Robillard, and participants at the 2010 Academy of Behavioral Finance and Economics Meeting. * Daniel Huerta is a Ph.D. Candidate at the University of Texas-Pan American, Edinburg, TX, USA. Daniel Perez-Liston is an Assistant Professor at Prairie View A&M University, Prairie View, TX, USA.