How does air pollution affect the stock market performance? Evidence from China

Abstract

Given its broad impact on human society, air pollution could become a non-economic factor affecting the stock market. But the impact of air pollution on the stock market performance has not received enough attention. This study examines the influence and potential mechanism of air pollution on stock market performance based on the panel data of 1344 A-share listed firms in China covering the period 2013–2019. The result shows that air pollution can negatively affect stock market performance. Second, heterogeneity analysis creatively points out that firms with less analysts, smaller size, stated-owned ownership, polluting related industry are more vulnerable to the negative effects of air pollution. Finally, the result also reveals a mechanism that air pollution could worsen the stock market by depressing investors’ sentiments. The above findings enrich current research related to the impact of air pollution on stock market performance and also provide a new perspective for investors to make stock investment decisions.

How air pollution affects corporate total factor productivity?

“…The impact of air pollution on investor sentiment has been confirmed [21]. The deterioration of air pollution can bring pessimistic emotions to investors, which can reduce corporate investment [20]. However, due to government regulation and corporate environmental responsibility, air pollution may force companies to increase investment in green technology innovation [41].…”

“…In terms of air quality and investor sentiment, when investors are in an environment with severe air pollution, they will generate negative emotions, which is detrimental to stock liquidity [20]. Air quality can have a negative impact on investor behavior and may lead to a decrease in trading willingness [21].…”