ESG greenwashing and equity mispricing: Evidence from China

This paper explores the impact of ESG greenwashing on equity mispricing. Using a firm-level panel dataset from 2011 to 2021, we posit and document that ESG greenwashing provokes investor sentiment, thus leading to equity mispricing. Compared with the relationship with underpricing, the positive relationship between ESG greenwashing and overpricing is more significant. Cross-sectional tests show that the impact is especially evident in the pre-COVID-19 era, in firms with low-quality external auditing, in firms with low levels of industry competition, and in firms operating in less environmentally regulated areas. Furthermore, we find that peer firms' ESG greenwashing is positively related to equity mispricing.

Automated summary

This paper investigates the impact of ESG greenwashing on equity mispricing. The study finds that ESG greenwashing triggers investor sentiment, leading to mispricing of equities. In comparison to underpricing, the positive relationship between ESG greenwashing and overpricing is more significant. The impact is particularly evident in the pre-COVID-19 era, among firms with low-quality external auditing, low levels of industry competition, and operating in less environmentally regulated areas. Furthermore, the study reveals a positive relationship between peer firms' ESG greenwashing and equity mispricing.