Is Air-Quality a Risk Factor that Affects Stock Returns？
53 Pages Posted: 16 Jan 2018
Date Written: January 16, 2017
Different from prior research that studies weather related factors on equity returns from a behavioral perspective, we investigate air quality on stock returns from a risk perspective using Chinese data. When air-quality risk increases, it not only depresses economic activities of firms but also alters investors’ preference for their stocks as well. In response to the increased pollution risk, current stock price will drop, but future return will increase. Using a unique measure of aggregate air quality change, we estimate air-quality risk for individual firms, and are able to explain future return differences with these beta estimate from a cross-sectional perspective. Moreover, we show that the cross-sectional differences in the pollution beta are related to firms’ future profit margins, investment, and per capita output. In addition, we present a natural experiment suggesting that the air-quality is an independent risk factor.
Keywords: AQI, Air Quality Beta, CSR, Pollution Risk, Cross-Sectional Returns
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