Environmental regulation and firm product quality improvement: How does the greenwashing response?

Abstract

With the growing requirements for green development, a firm's product quality matters greatly for targeting sustainable growth and industry improvements, thus it is vital to clarify the subtle relationship between environmental regulation and how firms improve product quality. This paper discusses the internal mechanisms of environmental regulation to improve the product quality during this green transformation period by enhancing the greenwashing capabilities of firms. Through matching and constructing a unique database including firm-level fundamental variables, product quality, and ESG information, we obtained a firm-level unbalanced dataset for the years 2013 and 2015. From this, we drew several findings. First, environmental regulations can help improve the quality of products. Specifically, environmental regulations cannot significantly and directly improve the product quality for heavy-pollution firms, and there is a positive and significant relationship between environmental regulation and product quality for low-pollution firms. Second, for heavy-pollution firms, environmental regulation has a negative and significant impact on product quality, which illustrates that greenwashing strongly motivates heavy-pollution firms and results in decreasing product quality. Third, financial constraints motivate the heavy-pollution firms to significantly decrease their product quality rather than improve it. Finally, there is a negative and significant effect on SOEs toward product quality improvement caused by environmental regulation for heavy-pollution industries. In the contrast, for low-pollution firms, SOEs are more incentivized to increase product quality.