Institutional investors’ green attention and corporate greenwashing: The effectiveness of external governance

Abstract

Institutional investors are increasingly focused on firms’ environmental governance. However, firms with limited substantive environmental practices may strategically engage in greenwashing by disclosing false or misleading environmental information. Using data from Chinese A-share listed firms from 2012 to 2022, we find that institutional investors’ green attention can exacerbate greenwashing, especially among firms facing greater financial constraints or incurring higher managerial expenses. Conversely, greater equity ownership by institutional investors is associated with reduced greenwashing. Moreover, the implementation of China’s New Environmental Protection Law has strengthened the effectiveness of institutional investors’ environmental oversight, highlighting the importance of aligning macro-level regulations with firm-level governance mechanisms to enhance green governance outcomes.