Brightening the Dark Side of Environmental Regulation: Evidence from Green Revenues and Greenwashing Behaviors

ABSTRACT Unintended consequences of environmental regulations can diverge from their original goals, undermining the validity and effectiveness and potentially leading to new challenges separate from those originally targeted for resolution. This study addresses the hot-debated question of whether and how green revenues serve as a pivotal factor in mitigating the unintended consequences of stringent environmental regulations. Using a difference-in-differences model, we find firms significantly enhance their greenwashing practices after China’s Emission Trading Scheme (ETS). However, we document that ETS firms generating green revenues significantly reduce their greenwashing practices. We identify firms’ green awareness, ability for green innovations, and environmental transformation as the underlying mechanisms. Our findings align with the resource-based view and stakeholder theory. Our study provides policymakers and practitioners with ex ante evidence on how to mitigate the unintended consequences of environmental regulations, preserving their validity and effectiveness. Data Availability: Data used in this study are available from the sources identified in the text. JEL Classifications: G38; M41; Q56.