Vienna Graduate School of Finance

The Vienna Graduate School of Finance investigates how the financial system can bolster human development`s resilience in the face of existential risks, particularly those arising from climate change, pandemics, and geopolitical crises. In these contexts, financial markets assume a pivotal role, as they must enable the reallocation of capital to mitigate such risks. Our research focuses on how these risks influence securities prices, firms costs of capital, investment and employment decisions, and the overall stability of the financial system. We seek to identify the key characteristics that determine a firm`s vulnerability to existential risks. Critical factors include financial structures such as leverage, debt maturity, and cash reserves. Our analysis examines whether these financial attributes enhance a firm`s resilience against disasters. Furthermore, we explore the duration of the impact specific risk eventslike droughts, wildfires, or climate change-induced floodshave on stock prices, firms` cost of capital, and financial stress within the banking sector. Traditional finance theory posits that security prices are driven solely by the net present value of expected future cash flows. However, this perspective has faced increasing scrutiny as growing evidence suggests that households, institutions, and corporate executives also consider ethical and social factors in their investment decisions. The influence of these social preferences on real economic outcomes is the subject of ongoing debate among practitioners and academics. Consequently, several of our projects investigate how social preferences shape the transition to a green economy, focusing on the mechanisms through which investors` social values affect corporate behavior. Existential risks, such as those associated with climate change, can precipitate bank failures, leading to severe economic and social consequences. A critical lesson from the 2007-2009 financial crisis is that standard bankruptcy procedures are inadequate for banks. As such, our research evaluates the costs and benefits of different bank bankruptcy resolution regimes. Should a banking group be treated as a single entity, with bankruptcy resolved by fully mutualizing losses across the group, or should each bank within the group be treated separately, without mutualizing losses? This decision has a direct impact on how a banking group responds to economic shifts, including whether it continues or reduces lending to households and businesses. Our research identifies the conditions under which different resolution regimes yield more efficient investment outcomes and how these conditions vary based on the characteristics of the banking group. At the heart of all these projects is the fundamental question: which key features of financial markets exacerbate existential risks that humanity currently faces, and which ones mitigate them?