The impact of air pollution on green investments: Green preference and investor sentiment

Green assets are sensitive to environmental changes and are pivotal in achieving sustainable development. Some empirical studies have shown that air pollution, as part of environmental change, affects stock market investment; however, the mechanisms by which air pollution affects investment in green assets have not been explored in depth. This study investigates the impact of air pollution on green stocks through investor sentiment and green preference. Our empirical analysis reveals that declining air quality prompts negative investor sentiment, exerting an adverse impact on the stock market. Conversely, green preference exerts a positive influence on green stocks, with the magnitude of this effect being contingent on the degree of greenness (i.e., depth and breadth) of the stocks. Companies with a high degree of greenness experience a significant positive correlation between air pollution and stock prices, whereas this relationship is not significant for companies with lower greenness. Furthermore, the COVID-19 pandemic has served to alleviate the impact of air pollution on the stock market due to the diversion of public attention by COVID-19. These findings show that governments can take measures to mitigate negative impacts and facilitate green preference to promote green economic transformation and upgrading.