Drawing on prior research that links environmental conditions to investor sentiment, along with insights from the literature on local bias, we propose a negative association between air pollution and stock market performance. Empirical results are consistent with this expectation, indicating that firms located in more polluted cities exhibit lower stock returns and reduced trading activity. Supporting our core hypothesis, the effects are especially pronounced among firms with a predominantly regional investor base—characterized by limited institutional ownership and sparse analyst coverage. Moreover, the influence of air pollution on market outcomes appears to have weakened over time, suggesting that investors gradually adapt their trading behavior as they assimilate environmental risks into their decision-making processes.