The Mechanism of Green Bleaching Behavior on ESG Stock Price Correlation

The rapid expansion of Environmental, Social, and Governance (ESG) investing has introduced significant market inefficiencies due to the prevalence of greenwashing, where firms manipulate sustainability claims to attract investment. This study examines how greenwashing distorts the ESG-stock price relationship through three interconnected mechanisms across different market layers. At the information layer, greenwashing introduces signal distortion, increasing noise in ESG data and leading to adverse selection. At the cognitive layer, recognition lag arises due to rigid ESG rating methodologies and investors limited expertise, delaying market correction. At the market layer, the reflexive cycle mechanism drives self-reinforcing valuation inflation, forming speculative bubbles. These mechanisms collectively exacerbate stock mispricing, increase capital costs, and undermine market efficiency. The results make it clear that stronger regulations, third-party ESG verification, and real-time monitoring of environmental data are needed right away to stop greenwashing and boost the credibility of ESG investments.