When watchdogs climb the ladder: vertical reform of environmental agency and corporate greenwashing

Why does corporate greenwashing persist, even amid intensifying environmental regulation? This study addresses this paradox by examining the Vertical Reform of Environmental Agencies (VREA), a major institutional restructuring in China that centralized environmental regulatory authority and strengthened the independence of local environmental enforcement. Exploiting this reform as a quasi-natural experiment, we find that the VREA significantly curbs ESG-related greenwashing behaviour. We identify three mechanisms driving this effect: enhanced regulatory scrutiny, heightened reputational and compliance sensitivity among politically connected firms, and increased perceived risk among firms with prior violations. The reform’s impact is more pronounced among non-state-owned enterprises, financially constrained firms, and those operating in regions with a speculative culture; in contrast, larger firms and those led by environmentally experienced executives exhibit a muted response. Our findings highlight that beyond the design of environmental policy instruments, the institutional configuration of regulatory authority plays a critical role in shaping corporate disclosure incentives. By restructuring bureaucratic power and weakening local protectionism, vertically integrated governance can serve as an effective institutional constraint on opportunistic sustainability disclosures.