Watchdogs of greenwashing: The role of long-term institutional cross-ownership

Abstract

A growing number of institutional investors are showing interest in “green” firms, highlighting the increasing importance of environmental, social, and governance (ESG) information. However, as the use of mainstream ESG data expands, the prevalence of greenwashing is also rising. This paper investigates how long-term institutional cross-ownership influences corporate responses to this critical stakeholder concern. We hypothesize that long-term institutional cross-ownership mitigates corporate greenwashing by enabling investors to acquire in-depth information and directly monitor firms in the context of systematic risk management. Our findings indicate that firms with long-term cross-ownership exhibit significantly lower levels of greenwashing. Supporting the information-gathering hypothesis, the effect is more pronounced in firms operating in hard-to-value industries. Supporting the direct monitoring hypothesis, the effect is less evident among firms subject to heightened external scrutiny. Overall, our study suggests that longer investment horizons lead institutional cross-owners to enhance the transparency of stakeholder-related activities, driven primarily by financial motivations.