Putting firms in the spotlight: does the mismatch between words and actions or suspicions of greenwashing drive stock risk premiums?

Prior studies define corporate greenwashing as inconsistent and exaggerated environmental disclosures compared with actual practices. This study explores how the stock market identifies and penalizes greenwashing risks, focusing on mismatches between companies’ words and actions and suspicions of greenwashing. Using data from non-financial Chinese A-share firms that publish CSR reports (2008–2021), we test the stock risk premium effects of greenwashing. The results show that investors demand higher premiums due to greenwashing suspicions, while textual evidence of greenwashing amplifies negative reactions, but does not directly increase premiums. The mechanism analysis reveals that exposure to reputational risk, financial misallocation, and information frictions drive premium increases. Heterogeneity analysis indicates that external pollution shocks, internal financial regulations, and corporate strategies affect the amount of premiums. Moreover, firms mimic their peers’ disclosure formats to reduce their environmental information risks, which triggers a transmission of greenwashing and exacerbates systemic risks. Contrary to the view that heavily polluting firms are major greenwashers, low-polluting firms bear higher greenwashing risk premiums because investors already consider the environmental risks of heavily polluting firms. This study measures the likelihood of greenwashing by integrating its motives, expressions, and behaviors, thus offering policy insights for green finance and corporate environmental disclosure frameworks.