Do environmental regulations affect investors? Evidence from China’s action plan for air pollution prevention

Theoretical predictions on the impact of environmental regulations on firm value in stock market are inconclusive. This paper examines whether and how stock market reacts to environmental regulations in China. We find that overall market-wide reactions are inconclusive while the cross-sectional tests show that stocks in polluting industries significantly and robustly underperform other stocks. Moreover, the worsening effect of environmental regulations on firm value is more pronounced among firms without political connections and firms located in rons with more effective judicial enforcement as the investors expect that these regulations will be effectively enforced. Our results show that China’s green campaign does have value implications for stock markets. •China’s Air Pollution Prevention and Control Action Plan affects shareholder value.•High-polluting stocks significantly underperform low-polluting stocks.•Stocks without political connections in high-polluting industries show lower returns.•Better judicial enforcement makes the differences in shareholder value stronger.