Greenwashing and the efficiency of new information price discovery

• We examine how corporate greenwashing influences firms’ information environment. • We find slower price adjustments to new information following greenwashing incidents. • Deceptive greenwashing garbles information environment, which hampers pricing efficiency. Leveraging RepRisk’s assessments of controversies related to firms’ environmental, social, and governance (ESG) practices between 2007 and 2018, we examine how corporate greenwashing influences a firm’s information environment and investor behavior. Using a staggered difference-in-difference (DiD) framework, our analysis reveals prices adjust to new information significantly more slowly when companies engage in greenwashing. In cross-sectional tests, we further show that greenwashing incidents have less of an impact on price discovery efficiency for firms with high ESG ratings and a stronger impact for firms with high institutional ownership. These findings suggest that investors react unfavorably to greenwashing events, perceiving them as garbling the information environment, which hampers the efficiency with which new information is incorporated into stock prices.