The Pollution Premium

PO‐HSUAN HSU, Kai Li, Chi-Yang TsouFinance资产定价UTD24

Journal of Finance2023-02-27Guangdong University Of Finances and EconomicsDOI

Citations520

ABSTRACT This paper studies the asset pricing implications of industrial pollution. A long‐short portfolio constructed from firms with high versus low toxic emission intensity within an industry generates an average annual return of 4.42%, which remains significant after controlling for risk factors. This pollution premium cannot be explained by existing systematic risks, investor preferences, market sentiment, political connections, or corporate governance. We propose and model a new systematic risk related to environmental policy uncertainty. We use the growth in environmental litigation penalties to measure regime change risk and find that it helps price the cross section of emission portfolios' returns.

Capital asset pricing modelRisk premiumPortfolioMarket portfolioCorporate governancePollutionEconomicsSystematic riskMarket riskFinancial economicsBusinessEconometrics