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The Pollution Premium

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  • PO‐HSUAN HSU
  • KAI LI
  • CHI‐YANG TSOU

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.

Suggested Citation

  • Po‐Hsuan Hsu & Kai Li & Chi‐Yang Tsou, 2023. "The Pollution Premium," Journal of Finance, American Finance Association, vol. 78(3), pages 1343-1392, June.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:3:p:1343-1392
    DOI: 10.1111/jofi.13217
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