Can penalties for environmental violations deter firms from engaging in greenwashing?

Abstract Preventing firms from engaging in greenwashing is a topic of significant theoretical and practical interest. This study examines the impact of penalties for environmental violations (PEVs) on mitigating greenwashing using a dataset of firms listed on China's A‐share market operating in heavily polluting industries from 2014 to 2020. We also examine how firm‐level characteristics moderate the relationship between PEVs and greenwashing. Our results demonstrate that PEVs can deter firms from engaging in greenwashing and that this negative effect is more pronounced for firms with greater financial slack, effective internal controls and political connections. Additional analysis indicates that PEVs have a negative effect on greenwashing for firms in the growth and mature stages but not for firms in the ‘shake‐out’ stage, and that there is a deterrence effect. Our findings have important implications for mitigating greenwashing behaviours through collaboration between governments and firms.