ESG news and firm value: Evidence from China’s automation of pollution monitoring

We study how financial markets integrate news about pollution abatement costs into firm values. Using China’s automation of pollution monitoring, we find that firms with factories in bad-news cities – cities that used to report much lower pollution than the automated reading – see significant declines in stock prices. This is consistent with the view that investors expect firms in high-pollution cities to pay significant adjustment and abatement costs to become “greener.” However, the efficiency with which such information is incorporated into prices varies widely – while the market reaction is quick in the Hong Kong stock market, it is considerably delayed in the mainland ones, resulting in a drift. The equity markets expect most of these abatement costs to be paid by private firms and not by state-owned enterprises, and by brown firms and not by green firms.