Vague Environmental Disclosure and Capital Market Responses in High-Pollution Industries: Evidence from Large Language Models

Abstract

A key question at the interface of sustainable finance and market efficiency is whether capital markets discipline firms not only for what they do—emissions, violations, or green investment—but also for how they communicate their environmental positions. Disclosure research suggests that the quality and verifiability of environmental narratives matter for investors, yet the pricing of narrative fuzziness itself remains underexplored. This study examines whether capital markets respond to the way high-polluting firms narrate green constraints in their annual reports. We construct a large-language-model-based fuzzy disclosure index (GFIX) from Chinese MD&A texts. Using only pre-2008 annual reports for scale learning, we train a two-stage comparator–scorer system from sentence-level pairwise judgments and apply it to MD&A sentences from 2008 to 2025. The resulting firm–year GFIX is matched with announcement-quarter stock returns and ownership data for 1016 high-polluting A-share firms. Double/debiased machine learning and panel fixed-effects estimates show that higher GFIX is systematically associated with significantly lower announcement-quarter returns, suggesting that investors treat fuzzy green narratives as a signal of information risk under green transition. The discount is concentrated in high-polluting manufacturing industries and firms with higher non-institutional ownership, while higher GFIX also predicts subsequent declines in institutional ownership. In addition, major Chinese green-regulatory milestones are followed by systematic increases in GFIX. These findings indicate that narrative clarity is an economically meaningful channel through which green transition and environmental regulation are transmitted to asset prices and ownership reallocations. These findings carry direct implications for sustainable finance: disclosure verifiability appears to be a first-order determinant of how green-transition risks are priced, and strengthening the verifiability of mandatory environmental disclosure can lower information risk, reduce the discount applied to opaque narrators, and support the orderly pricing of transition risks, in line with SDG 12 (responsible consumption and production) and SDG 13 (climate action).