Stock market response to environmental policies: Evidence from heavily polluting firms in China

By Mengmeng Guo, Yicheng Kuai, Xiaoyan Liu. 2020

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Abstract Pollution problems have recently become prominent in China, which has not only amplified public concerns on environmental protection but has also pushed the Chinese government to enforce more stringent environmental regulation. In this paper, we investigate the stock market response to the release of new environmental policies in China from the perspective of investor attention. By using the event study methodology, we assess the impact of 10 environmental policies issued by the central government over the period of 2014–2017. We find consistent evidence that the announcement of new environmental policies hurts the stock returns of heavily polluting firms in the short term. Meanwhile, compared to environmental regulations, environmental laws result in more adverse market reactions due to stricter policy enforcement. More importantly, investor attention to the environment issues, as measured by the Baidu Index, plays an essential role in predicting the stock market response, as we find a higher Baidu Index leads to lower stock returns for heavily polluting firms. Heterogeneity analyses further reveal the negative impact of environmental policies on market value is contingent on firm characteristics such as size, ownership structure, profitability and industry.

Subfields: Economics and Econometrics, Marketing, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/8cdbfb1310b4f0accd28f56bf909fd722115f856

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