Stock Prices under Dust Dome: Evidence from Chinese Market

Abstract

Though the environmental issues have been increasingly important for global investors, studies of both environment and capital markets are scant in finance research. This study examines the effect of an environmental documentary, Under the Dome, on the stock prices of the environmentally friendly companies and the polluters listed on the Chinese stock market. We obtain the panel data from the Wind Financial Terminal from at daily frequency from Feb 9, 2015 to May 12, 2015 and apply propensity scoring matching (PSM) and difference in difference (DID) technique to identify the price impact of this documentary on the stock market. Specifically, each environmentally friendly company or polluting company, the treatment group, is matched with two companies selected as the control group. We show a significantly positive effect of the documentary on stock prices of the environmentally friendly companies and a negative effect on the polluters and this result is robust to another functional form. To explain the mechanism behind this phenomenon, we further show a significant correlation between the price change and some firm-level characteristics such as company name, news recommendation, market power, state holding, etc.

Keywords: Environment, Propensity Score Matching, Difference in Difference, Stock Prices

JEL Classification: G12, G15