Heavy metal contamination, which has received increased attention recently, adversely affects food safety by damaging soil and crop quality. In an environmentally concerned and efficient stock market, a negative environmental pollution incident will shock the stock prices of the companies involved. This paper uses the short-term event study approach to analyze the capital market reaction to a prominent heavy metal pollution incident in China, the 2013 “cadmium rice” event, and the subsequent policy regulations. Our findings show that listed companies in heavy metal industries experience significant negative abnormal stock returns during the “cadmium rice” event window. The market reacts weaker to subsequent policy regulations than to the incident itself. Significant negative abnormal stock returns can only be observed during the event window of legislation or regulative policy explicitly mentioning sanctions against companies. Strong past environmental performance by companies and greater media attention, which suggests fewer investor concerns regarding potential pollution punishment, can mitigate negative market reactions. Conversely, stricter regional environmental regulations may exacerbate these negative reactions. These findings confirm the effectiveness of capital markets in developing countries and underscore the significance of company environmental performance, particularly in light of environmental incidents concerning food safety. Meanwhile, strengthening the implementation of environmental policies, coupled with media monitoring, is necessary to control heavy metal pollution.