How does stock market react to environmental penalty announcements?

Environmental penalty announcement (EPA) has received increasing attention for its potential to convey valuable information and affect capital market performance. Using data on listed companies in China, this paper examines stock market reaction to environmental penalty announcements, the behavior of different types of investors, and the moderating factors of these responses. The findings show that (1) disclosure of EPA by listed companies results in negative abnormal returns, but this negative market reaction is not sustained. (2) Heavy polluters and non-state-owned enterprises are exposed to more negative abnormal returns when they disclose EPA. (3) Environmental reputation can mitigate the negative stock market reaction to EPA, while the participation of green investors will intensify this reaction. (4) Retail investors tend to sell stocks of companies that disclose EPA as media attention increases, while institutional investors increase their shareholding especially in companies that already have high holdings, high ESG scores, and in regions with low levels of green finance development. This paper serves as a reference for governments, firms, and stakeholders on stock market reaction to environmental information disclosures.