Deciphering the Intricate Influence of Greenwashing and Environmental Performance on Financial Outcome Through Panel VAR/GMM Analysis

This study explores the intricate interconnections between greenwashing, environmental performance (ESG), firm-specific characteristics, board composition, firm age, size, leverage, carbon emissions (CO 2 ), and financial performance. By applying a combination of panel VAR/GMM estimation, robust least squares regression, and Granger causality tests, the research draws upon comprehensive data spanning from 2009 to 2022 sourced from the Chinese Research Data Services Platform (CNRDS), Bloomberg, and Refinitiv. The dataset comprises 312 listed Chinese firms, yielding a total of 5335 observations. The findings reveal that past return on equity acts as a reinforcing mechanism for both financial performance and ESG outcomes, as it positively affects subsequent returns and environmental engagement. However, its influence on firm size, board structure, and Tobin’s Q is statistically insignificant. Additionally, greenwashing demonstrates a dual character: while it reflects strong internal consistency, it also significantly shapes environmental outcomes and market perceptions. Firm size stands out as a pivotal determinant. It exhibits high persistence over time and plays a crucial role in shaping governance structures and capital allocation decisions. Moreover, board composition is positively associated with firm size. Leverage and return on assets show consistent temporal persistence and exert substantial influence on various firm attributes. Although leverage may contribute positively under favorable conditions, its overall impact on sustainability and governance practices appears limited. Higher carbon emissions are associated with increased ESG disclosures, whereas stronger ESG performance contributes to emission reduction and modestly enhances financial outcomes. Tobin’s Q also emerges as a critical factor, significantly influencing sustainability practices. This suggests that firms respond to investor expectations by improving their ESG performance. Results from the robust least squares regression underscore the dominant roles of firm size, Tobin’s Q, and leverage in driving financial performance. In contrast, ESG scores, CO 2 emissions, and greenwashing do not exhibit any statistically significant direct effects on financial performance. Granger causality tests confirm unidirectional relationships from financial performance to key structural variables such as size, leverage, firm age, and Tobin’s Q. A notable bidirectional causal link is observed between return on assets and return on equity. However, sustainability and governance-related variables show no causal impact on financial performance. Overall, the study acknowledges limitations and offers policy recommendations along with directions for future research.