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Air pollution and stock returns: The cash flow risk channel

Author

Listed:
  • Li, Rong
  • Liu, Luxi
  • Qiu, Yun
  • Tian, Xiaohui

Abstract

This paper provides a novel explanation regarding the phenomenon that high local air pollution forecasts a low risk premium at the firm-level. Using Chinese stock market data, we show that there is a negative correlation between air pollution and stock return. Further empirical analysis reveals that pollution affects the stock market by changing the covariance between cash flows and the aggregate profitability shock. This result can be illustrated by a neoclassical q-theory model with air pollution as a factor affecting production.

Suggested Citation

  • Li, Rong & Liu, Luxi & Qiu, Yun & Tian, Xiaohui, 2024. "Air pollution and stock returns: The cash flow risk channel," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:pacfin:v:85:y:2024:i:c:s0927538x24001306
    DOI: 10.1016/j.pacfin.2024.102379
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    More about this item

    Keywords

    Air pollution; Stock returns; q-theory; Cash flow risk;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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