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How the Market Values Greenwashing? Evidence from China

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Abstract

In China, many firms advertise that they follow environmentally friendly practices to cover their true activities, a practice called greenwashing, which can cause the public to doubt the sincerity of greenization messages. In this study, I investigate how the market values greenwashing and further examine whether corporate environmental performance can explain different and asymmetric market reactions to environmentally friendly and unfriendly firms. Using a sample from the Chinese stock market, I provide strong evidence to show that greenwashing is significantly negatively associated with cumulative abnormal returns (CAR) around the exposure of greenwashing. In addition, corporate environmental performance is significantly positively associated with CAR around the exposure of greenwashing. Furthermore, my findings suggest that corporate environmental performance has two distinct effects on CAR around the exposure of greenwashing: the competitive effect for environmentally friendly firms and the contagious effect for potential environmental wrongdoers, respectively. The results are robust to various sensitivity tests.

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Notes

  1. “Green public relation (PR) is a sub-field of PRs that communicates an organization’s corporate social responsibility or environmentally friendly practices to the public. The goal is to produce increased brand awareness and improve the organization's reputation. Tactics include placing news articles, winning awards, communicating with environmental groups and distributing publications” (available at: http://en.wikipedia.org/wiki/Green_PR).

  2. Jay Westervelt, a New York environmentalist, first coined the term greenwashing in his 1986 essay regarding the hotel industry’s practice of placing placards in each room asking guests to reuse their towels to “save the environment”. He argued that hotels were actually using their green campaigns to reduce costs (Hayward 2009; "Usage" in Wikipedia 2013).

  3. “Since 2007, the Ministry of Environmental Protection of China has enacted measures regarding corporate environmental reporting” (Du et al. 2013, p. 3). “The Regulation on Environmental Information Disclosure, effective May 1, 2008, compels environmental agencies and heavy-polluting companies to publically disclose certain environmental information. Moreover, the government has enacted stricter regulations requiring Chinese listed firms to take environmental responsibility. Shanghai and Shenzhen stock exchanges issued several regulations and required a subset of listed firms to issue CSR reports from 2008 considering social, economic, and governmental sustainability and recognizing that environmental protection is one of the most important aspects of CSR. These regulations include: (1) notice of supervising the listed firms in Shanghai Stock Exchange to disclose the annual report of year 2008 (SHSE); (2) notice of supervising the listed firms in Shenzhen Stock Exchange to disclose the annual report of year 2008 (SZSE); and (3) guide to environmental information disclosure for listed firms in Shanghai Stock Exchange of year 2008 (SHSE) (Du et al. 2013, Footnote #3)”.

  4. For example, greenwashing has less influence in developed countries because of enforcement by regulatory agencies such as the Federal Trade Commission in the United States, the Competition Bureau in Canada, and the Committee of Advertising Practice and the Broadcast Committee of Advertising Practice in the United Kingdom (Wikipedia 2013).

  5. EntreMed’s stock price rose from 12.063 at the Friday close. On Monday, it opened at 85 and closed near 52 (Huberman and Regev 2001).

  6. Greenwashing lists provide investors with information about environmentally unfriendly activities. Investors can infer that firms with worse environmental conservation will be more likely to be environmentally unfriendly, although they might be not on the greenwashing list. In addition, greenwashing lists convey information about environmentally unfriendly firms in relation to others in an industry. As a result, around the exposure of greenwashing, I predict that those with worse environmental conservation will display contagious effects and those with better conservation will display competitive effects.

  7. The results are not qualitatively changed by deleting the top and the bottom 1 % of the sample, by no deletion, or by no winsorization.

  8. I acknowledge my great thanks to the referee for his/her insightful suggestion. The data in my study are quasi-panel-data type, so the OLS regression procedure is not very suitable. As a result, I conduct Hausman tests to determine whether fixed effects or random effects are appropriate for quasi-panel data in my study. Non-tabulated results of Hausman tests show that all null hypotheses are not rejected because all χ 2 values are insignificant. Therefore, according to Greene (2012), random effects regression using the feasible generalized least squares (FGLS) approach is more appropriate than fixed effects and the LSDV (the least squares dummy variable estimation) approach.

  9. To better and more visually illustrate the competitive effects and the contagious effects, I plot Figure 2 using adjusted CAR, measured as a firm’ s CAR minus average CAR of firms with exposed greenwashing. Also, the tendencies on CAR remain qualitatively similar to Figure 2 using the raw (original) CAR.

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Acknowledgments

I am especially grateful to the editor (Prof. Professor Gary S. Monroe) and two anonymous reviewers for their many insightful and constructive suggestions. I appreciate constructive comments from Quan Zeng, Yingjie Du, Wentao Feng, Dongchang Ke, Wei Jian, Hongmei Pei, Feng Liu, Jinhui Luo, Yingying Chang, Shaojuan Lai, Jun Lu, Hao Xiong, Xue Tan, and participants of my presentations at Xiamen University, Anhui University, Ocean University of China, Shandong university, and Shanghai University. I also thank Quan Zeng and Yingjie Du for excellent research assistance. I acknowledge the National Natural Science Foundation of China (Approval Number: 71072053), the Key Project of Key Research Institute of Humanities and Social Science in Ministry of Education (Approval Number: 13JJD790027), the Specialized Research Fund for the Doctoral Program of Higher Education of China (Approval Number: 20120121110007) and Xiamen University’s Prosperity Plan Project of Philosophy and Social Sciences (Sub-project for School of Management) for financial support.

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    Xingqiang Du

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Appendix

Appendix

See Tables 7 and 8.

Table 7 Variables definition
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Table 8 The procedures for computing corporate environmental performance score and the descriptive statistics for seven components and forty-five subcomponents of corporate environmental performance
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Du, X. How the Market Values Greenwashing? Evidence from China. J Bus Ethics 128, 547–574 (2015). https://doi.org/10.1007/s10551-014-2122-y

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