When Do Firms Oversell or Undersell Environmental Sustainability?: An Empirical Analysis of Sustainability Communications

Abstract

This study proposes an empirical framework to catalogue the varieties of corporate sustainability communications, and investigates characteristics and factors affecting how firms promote their environmental sustainability. We build three types of environmental communication: (1) neutral, (2) vocal, and (3) silent, based on a firm’s relative environmental communication (EC) and performance (EP). We also define two focus groups based on the discrepancy between EC and EP: (1) greenwashing, and (2) silent green, which are subsets of environmentally vocal and silent EC groups, respectively. Based on a sample of 3,316 observations from 529 publicly traded US firms from 2005 to 2013, our main empirical findings are as follows. First, there is a negative association between a firm's EC and EP, suggesting that a firm with a lower level of EP is likely to choose to be vocal about its environmental sustainability. Second, regulatory challenges and public norms significantly influence a firm's sustainability communication strategy -- high public attention tends to make a firm more vocal. Third, silent firms with a higher level of discrepancy exhibit lower price-earnings ratio (PER) and earnings per share (EPS). On the other hand, vocal firms tend to exhibit higher Tobin's q as their discrepancy increases. This suggests that there might exist significant market incentives on the firms when they oversell environmental sustainability.