Stock Market Liberalization and Corporate Greenwashing: Empirical Evidence From the Shanghai- (Shenzhen-) Hong Kong Connect

Utilizing the Shanghai- (Shenzhen-) Hong Kong Connect (hereafter, the Connects) as exogenous shocks to the liberalization of China's A-share stock market, we explore how stock market liberalization shapes local firms' greenwashing behaviors. The staggered difference-in-differences (DID) regressions reveal that Chinese public firms' greenwashing levels significantly decrease after they are accessible to foreign investors via the Connects. This finding remains valid in a broad battery of robustness tests, including those addressing concerns about the heterogeneous treatment effects in regular staggered DID estimations. Mechanism tests suggest that the Connects curb greenwashing by improving eligible firms' information transparency, but not by alleviating their financing constraints nor improving green preferences. Moreover, the impact of the Connects is greater for firms with higher ownership by foreign investors, more intensive external monitoring, or larger greenwashing incentives. These results indicate that stock market liberalization, exemplified by the Connects in our study, exerts external governance influences on local firms, thereby reducing their greenwashing propensity.