Regulatory-driven corporate greenwashing: Evidence from “low-carbon city” pilot policy in China

The “low-carbon city” pilot policy proposed by the Chinese central government mandates the treatment regions to aggressively reduce carbon emissions. Exploiting this regulation as a quasi-experiment, we document that the affected firms located in the treatment regions respond with more greenwashing. Specifically, they are more likely to make symbolic speech and selectively disclose positive information, while taking few substantive actions and suppressing negative news. This pattern is more pronounced for brown firms, state-owned enterprises, politically connected firms, firms located in regions with higher government interventions, and firms located in cities with higher GDP growth incentives. In addition, we show that the treatment firms with severer greenwashing generally earn higher realized returns after the pilot, suggesting that the market is misled by their stated greenness. These findings underscore the important role of mandatory carbon emissions reduction policies in driving corporate greenwashing, which could deceive both investors and regulators.