Green on paper, red in risk: the default consequences of corporate greenwashing

This study investigates the impact of corporate greenwashing on default risk among Chinese A-share listed firms from 2009 to 2023. Using Merton’s Distance to Default model, we find a significant negative relationship between greenwashing and financial stability, indicating that firms engaging in greenwashing face elevated default risk. This relationship is amplified in highly competitive markets, where external scrutiny and stakeholder pressure are intensified. In contrast, greater gender diversity on corporate boards weakens this relationship, suggesting that diverse boards may enhance oversight and curb the financial fallout of environmental misrepresentation. Further analyses reveal that the relationship is more pronounced in privately-owned firms and largely insignificant among state-owned enterprises. A Difference-in-Differences (DiD) approach confirms that greenwashing’s effect on default risk is especially severe in heavily polluting industries. Robustness checks using alternative specifications, two-step Generalised Method of Moments (GMM) estimation, Heckman selection models, Propensity Score Matching (PSM), and entropy balancing affirm the reliability of our findings. These results highlight the financial risks of greenwashing and the moderating roles of governance and market structure.