Can Sticks And Stones Break Your Bones? A Cross-Country Study Of The State’s Impact On Greenwashing

Governments are playing an increasingly important role in promoting corporate environmental sustainability. However, little is known about their ability to discourage firms from engaging in greenwashing by selectively disclosing more favorable and benign environmental information. In this paper, we explore two important mechanisms through which governments can affect firms’ behaviors in this area – environmental regulations and state ownership. We also study whether presence of external audit impacts the effectiveness of environmental regulations and state ownership in greenwashing mitigation. Our preliminary analysis is based on a sample of 1,731 firms from 34 countries between 2007 and 2017 and shows that both environmental regulations and state ownership are effective in preventing greenwashing by exerting coercive pressures and creating governance structures that align state owners’ and managers’ objectives. We also find that while central state ownership has a negative mitigating effect on firms’ greenwashing, ownership by local state entities or sovereign wealth funds does not have a significant impact. Lastly, we show that external audit of non-financial disclosure provides an additional layer of monitoring that can substitute regulations’ mitigation effect on firms’ greenwashing.