Does environmental regulation affect corporate greenwashing? Evidence from China’s Environmental Credit Rating Policy

Abstract

Grounded in institutional and agency theory, this paper examines whether and how environmental regulation affects corporate greenwashing in an emerging economy. Exploiting the staggered rollout of China’s Environmental Credit Rating Policy (ECRP) across provinces, we implement a difference-in-differences design for Chinese A-share listed firms over 2009–2023 and find that the policy significantly reduces the likelihood of corporate greenwashing. The result is robust to placebo tests, parallel-trend tests, heterogeneous treatment-effect analyses, treatment-effect models, additional regional controls, and controls for concurrent environmental and green-finance policies. Mechanism analyses indicate that the ECRP curbs greenwashing primarily by strengthening corporate governance and improving the efficiency of financial resource allocation. Cross-sectional evidence further shows that the policy’s inhibitory effect is more pronounced for highly polluting firms, for firms whose top executives have environmental backgrounds, for firms with weaker product-market positions, and for firms with closer government–firm ties, as well as in regions with higher social trust, more intense bank competition, and greater public concern about environmental issues. Overall, the findings highlight that embedding credible environmental information into regulatory and financial decision-making can make environmental regulation more effective in curbing greenwashing by reshaping firms’ governance and financing conditions.