Air pollution and stock market returns: actual effect vs public attention in an Indian context

PurposeThis paper analyzes how air pollution and the public attention to it influence the returns of stocks in the Indian context.Design/methodology/approachThe study uses firm-level data for the stocks listed on National Stock Exchange in India. Air quality is measured using the Air Quality Index (AQI) values provided by US Embassy and Consulates’ Air Quality Monitor in India. Google Search Volume Index (GSVI) of the relevant terms acts as the measure of public attention. Appropriate regression models are used to address how AQI and attention influence stock returns.FindingsIt is observed that degrading air quality alone is unable to explain the stock returns. It is the combined effect of increasing AQI and subsequent rise in associated public attention that negatively impacts these returns. Returns of firms with poor environment score component in their environmental, social, governance (ESG) scores are more negatively affected compared to firms with higher environment scores.Practical implicationsInvestors can make use of this knowledge to formulate effective trading strategies and ensure higher chances of profitability in the share market.Originality/valueTo the knowledge of the authors, no earlier study has investigated the effects of AQI and attention together to explain stock price movements. The study is conducted in the Indian context providing a unique opportunity to study the behavioral impact of these effects in one of the fastest growing global economies, which is also plagued by an alarming increase in ambient air pollution.