Air pollution, investor sentiment and stock liquidity.

With the aggravation of air pollution, the impact of air pollution on the stock market, especially from the perspective of investor sentiment, has been of great concern and widely discussed. Based on data from China's A-share listed firms from January 1, 2016, to December 31, 2020, the relationship between urban air pollution and stock liquidity of listed firms and the internal mechanism is examined. Firstly, based on local preference theory, we start by predicting the impact of air pollution on stock liquidity. We, then, build a regression model for air pollution and stock liquidity, introducing the intermediary effect model to detect the relationship between the two and its mechanism. Finally, by subdividing the samples, we discuss the differential impact of air pollution on stock liquidity under different circumstances. We found that when air pollution worsens it reduces stock liquidity. The results of the mechanism analysis show that investor sentiment plays an intermediary role in the process of air pollution affecting stock liquidity, and pessimism induced by air pollution can reduce stock liquidity. Heterogeneity test results show that there are differences in the impact of air pollution on stock liquidity between heavily polluting firms and non-heavily polluting firms, different industries, different city sizes, and different levels of air pollution, has a greater effect in non-heavily polluting enterprises, manufacturing and other industries, medium sized cities and light pollution. The results of this research have important reference value for environmental protection departments to establish and improve air pollution monitoring systems and for listed firms to improve stock liquidity and deal with the environmental financial risks appropriately.