Stakeholder legitimacy in firm greening and financial performance: What about greenwashing temptations?☆

Stakeholder activism is putting increasing pressure on firms to engage in greening conduct to enhance ESG performance and financial performance. Stakeholders have expectations about the legitimacy of firms' ESG conduct and ESG performance as they relate to financial performance. Using legitimacy theory, we first examine two compelling questions: (1) What legitimate firm practices support ESG performance? and (2) Does ESG performance directly lead to firm financial performance? As firms redefine their aims and pivot to ESG conduct, stakeholders are becoming increasingly concerned about the rising incidence of greenwashing. We examine two additional questions: (3) Is there a link between ESG performance and greenwashing? and (4) How does greenwashing affect firm financial performance? We find that stakeholder legitimacy is an antecedent to ESG performance and financial performance. Furthermore, firms with low ESG performance are more likely to greenwash than firms with high ESG performance, though greenwashing does not affect financial performance.