PM2.5, Investor Sentiment, and Stock Returns

Xiaobei Huang


This paper investigates how PM2.5 affects the stock price of firms from heavy polluting industries and environment-friendly industries in China, applying the emotion cognition theory into the investor sentiment theory framework. We argue that PM2.5 will affect people’s emotion, which in turn, affect their investing decision. Meanwhile, people will attribute the release of PM2.5 to heavy polluting firms, when have better predictions for environment-friendly firms. The empirical results are consistent with the argument: PM2.5 has negative impact on stock price of heavy polluted firms, and has positive impact on environment-friendly industries firms. The results of this paper imply that capital market can play as an “invisible hand” to improve air quality of China.


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