The Pollution Premium

By Kai Li, Po-Hsuan Hsu, Chi-yang Tsou. Social Science Research Network, 2023

461 citations recorded by the source corpus.

This paper studies the asset pricing implications of industrial pollution. A long-short portfolio constructed from firms with high versus low toxic emission intensity within industry generates an average return of 4.42% per annum, which remains significant after controlling for risk factors. We examine several possible explanations for this pollution premium, which include policy uncertainty with respect to environmental regulations, relatedness to existing systematic risks, investors' preference for social responsibility, market sentiment, political connection, and corporate governance. Our empirical evidence suggests that the pollution premium is attributable to environmental policy uncertainty, which constitutes a systematic risk in a general equilibrium model.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/22e62b73f9876a2d455c6e9832d5c7750394798d

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In Economics and Econometrics

1. George Skiadopoulos
2. Rastin Matin
3. Renato Faccini
4. L. Pham

Citations in the corpus

• Does the CDS Market Reflect Regulatory Climate Risk Disclosures? (2020, unknown): “(6)A decrease in profitability due to climate-risk exposure also underlies the general equilibrium model developed in Hsu et al. (2018), which is based on the political uncertainty model in Pástor and Veronesi (2012, 2013).”
• Dissecting Climate Risks: Are they Reflected in Stock Prices? (2021, result): “This is consistent both with our hedging explanation of the documented positive premium for climate-policy risk and with previous findings in the literature, that investors have become aware of climate change risks only in the most recent years (Krueger et al. (2020), Painter (2020), Bolton and Kacp”