How GDP Manipulation by Local Government Affects Corporate Greenwashing in China

Firms frequently face a tradeoff between the advantages of upholding sustainability and ESG performance and the expenses associated with participating in ESG initiatives. This tension leads to an increase in greenwashing practices, which ultimately undermines genuine sustainability efforts and misleads stakeholders. Motivated by this trend, our study examines the influence of a macro-level factor, specifically local city-level governments' GDP manipulation, on the extent of firms' greenwashing, highlighting how government behavior can distort sustainable business practices. Using the data of the publicly traded Chinese manufacturing companies during the period of 2007-2019, we find a positive and significant relationship between the extent to which firms engage in greenwashing and the extent of local city-level governments' GDP manipulation. Additional analysis reveals that firms' financial constraints and external monitoring are the channels through which governments influence firms' greenwashing. In addition, the finding of a positive association between firm greenwashing and government GDP manipulation is more pronounced in regions with a less developed marketization index, in periods before China's anti-corruption campaign, in state-owned firms, and in firms at the business life cycle of the mature stage. Our study addresses a gap in the literature by demonstrating how government economic interventions influence firms' sustainability performance.