Air quality, ES risks, and stock returns: Evidence from Korea

Abstract

This paper examines the impact of air quality index (AQI) on stock returns. Using data from listed Korean firms for the 2015-2021 period, we show that the dispersion in AQI adversely affects stock returns with one-standard-deviation rise in AQI resulting in a 3.0 percentage-point decline in stock returns. This relationship however becomes less pronounced in firms with lower environmental and social (ES) risks and more institutional investments. Our results provide implications for investors and policymakers by highlighting the importance of managing ES risks and the role of institutional investments in mitigating the adverse impact of air pollution on stock returns.