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Greenwash: Corporate Environmental Disclosure under Threat of Audit

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  • Thomas P. Lyon

    (Stephen M. Ross School of Business at the University of Michigan)

  • John W. Maxwell

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

We develop an economic model of “greenwash,” in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We identify conditions under which NGO punishment of greenwash backfires, inducing the firm to become less rather than more forthcoming about its environmental performance. We show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems. Mandatory disclosure rules offer the potential for better performance than NGO auditing, but the necessary penalties may be so large as to be politically unpalatable. If so, a mix of mandatory disclosure rules, NGO auditing and environmental management systems may be needed to induce full environmental disclosure.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2006-07-lyon-maxwell.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-07.

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Date of creation: Mar 2006
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Handle: RePEc:iuk:wpaper:2006-07

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References

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  1. Timothy J. Feddersen & Thomas W. Gilligan, 2001. "Saints and Markets: Activists and the Supply of Credence Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(1), pages 149-171, 03.
  2. Thomas P. Lyon & John W. Maxwell, 2004. "Astroturf: Interest Group Lobbying and Corporate Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 561-597, December.
  3. David P. Baron, 2003. "Private Politics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 31-66, 03.
  4. Patten, Dennis M., 1992. "Intra-industry environmental disclosures in response to the Alaskan oil spill: A note on legitimacy theory," Accounting, Organizations and Society, Elsevier, vol. 17(5), pages 471-475, July.
  5. Robert Innes, 2006. "A Theory of Consumer Boycotts under Symmetric Information and Imperfect Competition," Economic Journal, Royal Economic Society, vol. 116(511), pages 355-381, 04.
  6. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  7. Lyon,Thomas P. & Maxwell,John W., 2004. "Corporate Environmentalism and Public Policy," Cambridge Books, Cambridge University Press, number 9780521819473, December.
  8. Tom Tietenberg, 1998. "Disclosure Strategies for Pollution Control," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 587-602, April.
  9. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  10. Hyun Song Shin, 2003. "Disclosures and Asset Returns," Econometrica, Econometric Society, vol. 71(1), pages 105-133, January.
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Citations

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Cited by:
  1. Fabrice Etilé & Sabrina Teyssier, 2012. "Signaling Corporate Social Responsibility: Third-Party Certification vs. Brands," PSE Working Papers halshs-00736551, HAL.
  2. Walls, Judith L. & Phan, Philip H. & Berrone, Pascual, 2008. "An assessment of the construct validity of environmental strategy measures," IESE Research Papers D/754, IESE Business School.
  3. Charles H. Cho & Martin Freedman & Dennis M. Patten, 2009. "Corporate Disclosure Of Environmental Capital Expenditures: A Test Of Alternative Theories," Post-Print halshs-00459410, HAL.
  4. Cohen, Mark A. & Vandenbergh, Michael P., 2012. "The potential role of carbon labeling in a green economy," Energy Economics, Elsevier, vol. 34(S1), pages S53-S63.
  5. MAHENC Philippe, 2008. "Introducing Greens Goods," LERNA Working Papers 08.03.247, LERNA, University of Toulouse.
  6. Béatrice Parguel & Florence Benoît-Moreau, 2013. "The power of 'executional greenwashing'. Evidence from the automotive sector," Post-Print halshs-00948933, HAL.
  7. Blackman, Allen & Woodward, Richard T., 2009. "User Financing in a National Payments for Environmental Services Program: Costa Rican Hydropower," Discussion Papers dp-09-04, Resources For the Future.
  8. Markus Kitzmueller & Jay Shimshack, 2012. "Economic Perspectives on Corporate Social Responsibility," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 51-84, March.
  9. Christopher Marquis & Michael W. Toffel, 2011. "Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing," Harvard Business School Working Papers 11-115, Harvard Business School, revised Dec 2013.
  10. Matthieu Glachant & Gabrielle Moineville, 2012. "The informational role of nongovernmental organizations to induce self-regulation: Cheering the leaders or booing the laggards?," Working Papers hal-00716864, HAL.
  11. Gavronski, Iuri & Klassen, Robert D. & Vachon, Stephan & Nascimento, Luis Felipe Machado do, 2012. "A learning and knowledge approach to sustainable operations," International Journal of Production Economics, Elsevier, vol. 140(1), pages 183-192.
  12. Fabrice Etilé & Sabrina Teyssier, 2012. "Signaling Corporate Social Responsibility: Third-Party Certification vs. Brands," Working Papers halshs-00736551, HAL.
  13. Lyon, Thomas & Lu, Yao & Shi, Xinzheng & Yin, Qie, 2013. "How do investors respond to Green Company Awards in China?," Ecological Economics, Elsevier, vol. 94(C), pages 1-8.

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