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Pollution and Performance: Do Investors Make Worse Trades on Hazy Days?

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  • Jiekun Huang

    (Department of Finance, Gies College of Business, University of Illinois at Urbana–Champaign, Champaign, Illinois 61820;)

  • Nianhang Xu

    (School of Business, Renmin University of China, Beijing 100872, China;)

  • Honghai Yu

    (School of Management and Engineering, Nanjing University, Nanjing 210017, China)

Abstract

This paper examines the relation between air pollution and individual investors’ trading behavior and performance. Using unique data on stock trades by 87,504 individuals from 34 cities in China, we find a negative relation between air pollution and trade performance. This result is obtained after controlling for investor-year fixed effects and date fixed effects, as well as local weather conditions. More strikingly, abnormal trade performance decreases monotonically with the levels indicating the severity of air pollution. Furthermore, we find evidence suggesting that air pollution makes investors more susceptible to the disposition effect and attention-driven buying behavior. Overall, the results highlight a hitherto-unexplored cost that ambient air pollution imposes on stock market investors.

Suggested Citation

  • Jiekun Huang & Nianhang Xu & Honghai Yu, 2020. "Pollution and Performance: Do Investors Make Worse Trades on Hazy Days?," Management Science, INFORMS, vol. 66(10), pages 4455-4476, October.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:10:p:4455-4476
    DOI: 10.1287/mnsc.2019.3402
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