Subsidy expiration and greenwashing decision: Is there a role of bankruptcy risk?

Abstract

Subsidies greatly matter for green performance and sustainable growth through alleviating financial needs. However, once a subsidy shock occurs, caused at the point at which the subsidy expires, bankruptcy risk, and the business strategy known as greenwashing, potentially arise. This paper seeks to identify the relationship between subsidy shock and greenwashing through accessing information on Chinese listed companies during the period 2011 to 2021, and we have raised several findings accordingly. First, subsidy shock has a significant and positive effect on greenwashing behaviors. Second, we further uncover that companies with high financial risk or that are financially constrained are strongly motivated to greenwash after a subsidy expires. Companies that are motivated by subsidy shock to greenwash are significantly present in low competition markets. Moreover, we show that the greenwashing is created by reducing investment in innovation and efficiency, and increasing green innovation costs when organizations are facing financial risks. By identifying and deploying different measurements of greenwashing, we show our results to be robust.