Air pollution, local bias, and stock returns

Abstract

Building on research linking environmental factors to investors’ sentiments and the local bias literature, we posit that there is a negative relation between air pollution and a firm's stock return. Consistent with our hypothesis, we find that firms located in cities that experience higher levels of air pollution exhibit lower stock returns. In line with our central hypothesis, we observe the air pollution effect is stronger among firms that are more likely to be held by local investors, such as younger firms, firms that have lower institutional ownership, and firms covered by fewer analysts.