ESG greenwashing and stock price crash risk: a channel analysis

Using US data from the S&P 1500 indexed firms, we offer empirical evidence concerning the impact of ESG greenwashing on firms’ risk of future stock price crash. Specifically, we show that ESG greenwashing is positively associated with firms’ risk of a future stock price crash. Our findings are robust to instrumental variable, difference-in-differences, and entropy balancing approaches. Furthermore, we identify five potential channels (mediating factors) through which ESG greenwashing can increase the risk of a future stock price crash–the degree of private corporate news hiding, financial analysts’ forecast dispersion, investment inefficiency, excessive managerial risk-taking, and equity mispricing. Our findings suggest that firms exhibiting higher levels of ESG greenwashing tend to have greater degrees of private corporate news hiding, wider financial analysts’ forecast dispersions, increased investment inefficiency, heightened managerial risk-taking, and equity mispricing, all contributing to an elevated risk of future stock price crashes.