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Greenwash: Corporate Environmental Disclosure under Threat of Audit

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  • Thomas P. Lyon
  • John W. Maxwell

Abstract

We develop an economic model of “greenwash,” in which a firm strategically discloses environmental information and an activist may audit and penalize the firm for disclosing positive but not negative aspects of its environmental profile. We fully characterize the model's equilibria, and derive a variety of predictions about disclosure behavior. We rationalize conflicting results in the empirical literature, finding a nonmonotonic relationship between a firm's expected environmental performance and its environmental disclosures. Greater activist pressure deters greenwash, but induces some firms to disclose less about their environmental performance. Environmental management systems discourage firms with poor expected environmental performance from greenwashing, which may justify public policies encouraging firms to adopt them.

Suggested Citation

  • Thomas P. Lyon & John W. Maxwell, 2011. "Greenwash: Corporate Environmental Disclosure under Threat of Audit," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 3-41, March.
    • Handle: RePEc:bla:jemstr:v:20:y:2011:i:1:p:3-41
    DOI: 10.1111/j.1530-9134.2010.00282.x
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    References listed on IDEAS

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    1. Lyon,Thomas P. & Maxwell,John W., 2004. "Corporate Environmentalism and Public Policy," Cambridge Books, Cambridge University Press, number 9780521819473, January.
    2. 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, March.
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    7. 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.
    8. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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