Faculty Spotlight
Professor Matthew Gustafson
Matthew Gustafson arrived at Penn State right after completing his Ph.D. in Finance from the University of Rochester in 2013. Over the past decade, Matthew’s research interests have expanded from questions surrounding the corporate capital raising process to broader questions in corporate finance and climate finance. His work has been published in top academic business journals, including the Journal of Finance and the Journal of Financial Economics, featured in mainstream news outlets such as The Wall Street Journal, the New York Times, CNN, Bloomberg, and the Washington Post, and referenced in several Securities and Exchange Commission (SEC) rules.
Much of Matthew’s early work, including his Ph.D. dissertation, studied how corporate capital raising technologies evolved with the policy landscape. A broad conclusion from this research agenda is that legislative and market frictions can significantly increase the cost of raising capital and affect when, whether, and how firms raise capital. For example, his 2015 and 2017 Journal of Financial Economics articles “The JOBS Act and IPO Volume: Evidence that Disclosure Costs Affect the IPO Decision,” and “The Effects of Removing Barriers to Equity Issuance” both demonstrate how SEC rule changes that make it easier for small firms to raise capital in public markets immediately lead small firms to change the way they raise capital.
More recently, Matthew’s work on the economic impacts of weather and long-run climate risk exposure has gained national media attention and been regularly recognized by top academic finance journals. Matthew’s foray into climate finance began with a study of how firms manage weather-induced shocks to their cash flows. His paper “Weathering Cash Flow Shocks” was published in the Journal of Finance and offers some of the first evidence that adverse winter weather manifests in reduced cash flows for small businesses, especially in outdoor-centric industries. Furthermore, bank credit lines are a critical tool that these firms use to manage these shocks as banks work with their borrowers to extend additional credit.
Around the time Matthew received tenure in 2019, he embarked on a research agenda focused on understanding how (or if) markets price long-run climate risks. His 2019 paper, entitled “Disaster on the Horizon: The Price Effect of Sea Level Rise,” which was published as a lead article in the Journal of Financial Economics, provides some of the first evidence that residential real estate markets do in fact price long-run climate risks. Specifically, coastal real estate that may be exposed to sea level rise this century sells at a 7% discount to observable similar properties not exposed to such a risk. Consistent with this discount being due to home buyers pricing long-run climate risks, this effect manifests most starkly in the non-owner-occupied market, is not present in rental prices, and has grown over the past decade along with scientific projections for end of century sea level rise. A limitation to market-based studies is that they cannot say whether the observed discount is correct, but it is possible to see which participants are the most likely buyers at prevailing market prices. “Partisan Residential Sorting on Climate Change Risk,” also published in the Journal of Financial Economics, shows that Republicans are more likely to buy sea level rise exposed properties, consistent with national surveys indicating that Democrats view climate risks as more likely to manifest in the coming decades.
In follow-on work, Matthew addresses questions relating to the aggregate impacts of sea level rise exposure to certain coastal economies. His 2023 Review of Financial Studies paper entitled “Sea Level Rise Exposure and Municipal Bond Yields” finds that a school district’s aggregate sea level rise exposure predicts higher debt financing costs, and this increase is positively related to uncertainty in scientists’ sea level rise projections. The magnitude of the effect is only about 5 basis points for bondholders but corresponds to a larger potential impact on the underlying property base in the area. Taken together, Matthew’s work indicates that long-run climate risks are currently depressing the market prices of vulnerable assets. Thus, addressing the extent of and uncertainty in future climate damages will lead to immediate value creation today, which may be a partial offset for climate abatement costs.
One of Matthew’s favorite parts of being at Penn State is the opportunity to work with doctoral students. Over the years he has advised or been on the doctoral committee of over ten students and has coauthored papers with eight different Penn State Ph.D. students. He has also enjoyed administering the finance Ph.D. program at Penn State for the past two years and looks forward to continuing in this role.