Does Financial Performance Shield Greenwashers? Evidence from European Firms
DOI:
https://doi.org/10.47743/saeb-2026-0019Keywords:
greenwashing, total risk, systematic risk, agency theory, legitimacy theory.Abstract
This paper attempts to examine the impact of greenwashing on firms’ risk and the shielding effect of financial performance across different sustainability conditions. Using a sample of 457 non-financial firms from European countries and a two-step generalized method of moments (GMM) model, this study assesses the moderating role of financial performance in the relationship between greenwashing and firm risk. In this study, we use both total risk and market risk to measure firms’ risk. To address construct validity, we operationalize greenwashing as the industry-adjusted abnormal gap between a firm's self-reported envi-ronmental, social, and governance (ESG) score and its controversy-adjusted ESG combined score, thereby capturing intentional ESG decoupling. We have documented that green-washing increases firms’ risk when sustainability conditions are not enough developed. Furthermore, our results reveal that financial performance effectively mitigates the adverse impact of greenwashing on firm risk primarily under transitioning (medium) sustainability conditions. Overall, our findings indicate that the risk effects of greenwashing are context-dependent across different sustainability development levels.
References
Ahmed, A., Neel, M., & Safdar, I. (2024). Why does operating profitability predict returns? New evidence on risk versus mispricing explanations. Accounting and Finance, 64(2), 1243–1276. http://dx.doi.org/10.1111/acfi.13178
Ahmed, M. F., Gao, Y., & Satchell, S. (2021). Modeling demand for ESG. European Journal of Finance, 27(16), 1669–1683. http://dx.doi.org/10.1080/1351847X.2021.1924216
Ali, S., Zahid, R. M. A., Battisti, E., & Vincurova, Z. (2025). Environmental innovation and corporate financial performance: the moderating role of greenwashing. International Journal of Emerging Markets, 21(2), 535–557. http://dx.doi.org/10.1108/IJOEM-09-2024-1611
Altman, E. I. (1968). The Prediction of Corporate Bankruptcy: A Discriminant Analysis. The Journal of Finance, 23(1), 193–194. http://dx.doi.org/10.2307/2325319
Amel-Zadeh, A., & Serafeim, G. (2018). Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), 87–103. http://dx.doi.org/10.2469/faj.v74.n3.2
Angel, K., Menéndez-Plans, C., & Orgaz-Guerrero, N. (2018). Risk management: Comparative analysis of systematic risk and effect of the financial crisis on US tourism industry: Panel data research. International Journal of Contemporary Hospitality Management, 30(3), 1920–1938. http://dx.doi.org/10.1108/IJCHM-03-2016-0173
Ben-Zion, U., & Shalit, S. S. (1975). Size, leverage, and dividend record as determinants of equity risk. The Journal of Finance, 30(4), 1015–1026. http://dx.doi.org/10.1111/j.1540-6261.1975.tb01018.x
Bharath, S. T., & Shumway, T. (2008). Forecasting default with the Merton distance to default model. Review of Financial Studies, 21(3), 1339–1369. http://dx.doi.org/10.1093/rfs/hhn044
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. http://dx.doi.org/10.1016/S0304-4076(98)00009-8
Brown, G., & Kapadia, N. (2007). Firm-specific risk and equity market development. Journal of Financial Economics, 84(2), 358–388. http://dx.doi.org/10.1016/j.jfineco.2006.03.003
Cai, Y., Pan, C. H., & Statman, M. (2016). Why do countries matter so much in corporate social performance? Journal of Corporate Finance, 41, 591–609. http://dx.doi.org/10.1016/j.jcorpfin.2016.09.004
Chen, P., & Dagestani, A. A. (2023). Greenwashing behavior and firm value–From the perspective of board characteristics. Corporate Social Responsibility and Environmental Management, 30(5), 2330–2343. http://dx.doi.org/10.1002/csr.2488
Christopher, R., Kim, S. J., & Wu, E. (2012). Do sovereign credit ratings influence regional stock and bond market interdependencies in emerging countries? Journal of International Financial Markets, Institutions and Money, 22(4), 1070–1089. http://dx.doi.org/10.1016/j.intfin.2012.01.003
Cohen, G. (2023). ESG risks and corporate survival. Environment Systems & Decisions, 43(1), 16–21. http://dx.doi.org/10.1007/s10669-022-09886-8
Cormier, D., & Gordon, I. M. (2001). An examination of social and environmental reporting strategies. Accounting, Auditing & Accountability Journal, 14(5), 587–617. http://dx.doi.org/10.1108/EUM0000000006264
Department for Business Energy & Industrial Strategy. (2022). Why Net Zero, . Retrieved from London: https://www.gov.uk/government/publications/net-zero-strategy/1-why-net-zero
Dietrich, J. R. (1984). Discussion of Methodological Issues Related to the Estimation of Financial Distress Prediction Models. Journal of Accounting Research, 22, 83–86. http://dx.doi.org/10.2307/2490860
Doh, J., Rodrigues, S., Saka-Helmhout, A., & Makhija, M. (2017). International business responses to institutional voids. Journal of International Business Studies, 48(3), 293–307. http://dx.doi.org/10.1057/s41267-017-0074-z
Doidge, C., Karolyi, G. A., & Stulz, R. M. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics, 86(1), 1–39. http://dx.doi.org/10.1016/j.jfineco.2006.09.002
Donkor, A., Djajadikerta, H. G., Mat Roni, S., & Trireksani, T. (2022). Integrated reporting quality and corporate tax avoidance practices in South Africa’s listed companies. Sustainability Accounting, Management and Policy Journal,, 13(4), 899–928. http://dx.doi.org/10.1108/SAMPJ-03-2021-0116
Dowling, J., & Pfeffer, J. (1975). Organizational legitimacy: Social values and organizational behavior. Pacific Sociological Review, 18(1), 122–136. http://dx.doi.org/10.2307/1388226
Du, X. (2015). How the market values greenwashing? Evidence from China. Journal of Business Ethics, 128(3), 547–574. http://dx.doi.org/10.1007/s10551-014-2122-y
Gallas, S., Chouchene, M. R., & Bouzgarrou, H. (2025). Greenwashing Illusion and Financial Performance: The Moderating Role of Environmental Practices. Business Strategy & Development, 8(4), 1–20. http://dx.doi.org/10.1002/bsd2.70234
Ghitti, M., Gianfrate, G., & Palma, L. (2024). The agency of greenwashing. The Journal of Management and Governance, 28(3), 905–941. http://dx.doi.org/10.1007/s10997-023-09683-8
Gregory, R. P. (2024). How greenwashing affects firm risk: An international perspective. Journal of Risk and Financial Management, 17(11), 1–30. http://dx.doi.org/10.3390/jrfm17110526
Habermann, F., & Fischer, F. B. (2023). Corporate Social Performance and the Likelihood of Bankruptcy: Evidence from a Period of Economic Upswing. Journal of Business Ethics, 182(1), 243–259. http://dx.doi.org/10.1007/s10551-021-04956-4
Hauch, S. (2026). ESG rating divergence and corporate credit risk. The Journal of Risk Finance, 27(1), 132–157. http://dx.doi.org/10.1108/JRF-05-2025-0236
Hawn, O., & Ioannou, I. (2016). Mind the gap: The interplay between external and internal actions in the case of corporate social responsibility. Strategic Management Journal, 37(13), 2569–2588. http://dx.doi.org/10.1002/smj.2464
Huang, H., Xing, X., He, Y., & Gu, X. (2020). Combating greenwashers in emerging markets: A game-theoretical exploration of firms, customers and government regulations. Transportation Research Part E, Logistics and Transportation Review, 140. http://dx.doi.org/10.1016/j.tre.2020.101976
Jamali, D., Lund-Thomsen, P., & Khara, N. (2017). CSR institutionalized myths in developing countries: An imminent threat of selective decoupling. Business & Society, 56(3), 454–486. http://dx.doi.org/10.1177/0007650315584303
Jauernig, J., & Valentinov, V. (2019). CSR as hypocrisy avoidance: A conceptual framework. Sustainability Accounting, Management and Policy Journal, 10(1), 2–25. http://dx.doi.org/10.1108/SAMPJ-05-2018-0141
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. http://dx.doi.org/10.1016/0304-405X(76)90026-X
Khorilov, T. G., & Kim, J. (2024). ESG and firm risk: Evidence in Korea. Sustainability (Basel), 16(13). http://dx.doi.org/10.3390/su16135388
Kim, E. H., & Lyon, T. P. (2015). Greenwash vs. brownwash: Exaggeration and undue modesty in corporate sustainability disclosure. Organization Science, 26(3), 705–723. http://dx.doi.org/10.1287/orsc.2014.0949
Korinth, F., & Lueg, R. (2022). Corporate Sustainability and Risk Management—The U‐Shaped Relationships of Disaggregated ESG Rating Scores and Risk in the German Capital Market. Sustainability (Basel), 14(9). http://dx.doi.org/10.3390/su14095735
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155. http://dx.doi.org/10.1086/250042
Landi, G. C., Iandolo, F., Renzi, A., & Rey, A. (2022). Embedding sustainability in risk management: The impact of environmental, social, and governance ratings on corporate financial risk. Corporate Social Responsibility and Environmental Management, 29(4), 1096–1107. http://dx.doi.org/10.1002/csr.2256
Ledeboer, P., & Kil, J. (2023). The effects of a company’s greenwashing practices on stock liquidity & stock price volatility: Evidence from the S: Erasmus University, Erasmus School of Economics.
Li, W., Li, W., Seppänen, V., & Koivumäki, T. (2023). Effects of greenwashing on financial performance: Moderation through local environmental regulation and media coverage. Business Strategy and the Environment, 32(1), 820–841. http://dx.doi.org/10.1002/bse.3177
Lim, A., & Tsutsui, K. (2012). Globalization and commitment in corporate social responsibility: Cross-national analyses of institutional and political-economy effects. American Sociological Review, 77(1), 69–98. http://dx.doi.org/10.1177/0003122411432701
Liu, G., Qian, H., Shi, Y., Zhang, Y., & Wu, F. (2024). Does ESG report greenwashing increase stock price crash risk? China Journal of Accounting Studies, 12(3), 615–639. http://dx.doi.org/10.1080/21697213.2024.2303070
Long, L., Wang, C., & Zhang, M. (2025). Does social media pressure induce corporate hypocrisy? Evidence of ESG greenwashing from China. Journal of Business Ethics, 197(2), 311–338. http://dx.doi.org/10.1007/s10551-024-05747-3
Lueg, K., Krastev, B., & Lueg, R. (2019). Bidirectional effects between organizational sustainability disclosure and risk. Journal of Cleaner Production, 229, 268–277. http://dx.doi.org/10.1016/j.jclepro.2019.04.379
Lund-Thomsen, P., Lindgreen, A., & Vanhamme, J. (2016). Industrial clusters and corporate social responsibility in developing countries: What we know, what we do not know, and what we need to know. Journal of Business Ethics, 133(1), 9–24. http://dx.doi.org/10.1007/s10551-014-2372-8
Mao, C. W. (2019). Effect of corporate social responsibility on corporate tax avoidance: Evidence from a matching approach. Quality & Quantity, 53(1), 49–67. http://dx.doi.org/10.1007/s11135-018-0722-9
Marquis, C., & Toffel, M. W. (2012). When do firms greenwash?: Corporate visibility, civil society scrutiny, and environmental disclosure: Harvard Business School Boston.
Marquis, C., Toffel, M. W., & Zhou, Y. (2016). Scrutiny, norms, and selective disclosure: A global study of greenwashing. Organization Science, 27(2), 483–504. http://dx.doi.org/10.1287/orsc.2015.1039
Matos, P. (2020). ESG and responsible institutional investing around the world: A critical review: John Wiley & Sons.
Meles, A., Salerno, D., Sampagnaro, G., Verdoliva, V., & Zhang, J. (2023). The influence of green innovation on default risk: Evidence from Europe. International Review of Economics & Finance, 84, 6922–6710. http://dx.doi.org/10.1016/j.iref.2022.11.036
Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of Finance, 29(2), 449–470.
Mirza, R., Bhuiyan, T., & Hoque, A. (2025). False Stability? How Greenwashing Shapes Firm Risk in the Short and Long Run. Journal of Risk and Financial Management, 18(12). http://dx.doi.org/10.3390/jrfm18120691
Na, K., Kang, Y. H., & Kim, Y. S. (2018). The effect of corporate governance on the corruption of firms in BRICs (Brazil, Russia, India & China). Social Sciences (Basel, Switzerland), 7(6), 1–16. http://dx.doi.org/10.3390/socsci7060085
O’Donovan, G. (2002). Environmental disclosures in the annual report: Extending the applicability and predictive power of legitimacy theory. Accounting, Auditing & Accountability Journal, 15(3), 344–371. http://dx.doi.org/10.1108/09513570210435870
Ohlson, J. A. (1980). Financial Ratios and the Probabilistic Prediction of Bankruptcy. Journal of Accounting Research, 18(1), 109–131. http://dx.doi.org/10.2307/2490395
Patten, D. M. (1992). Intra-industry environmental disclosures in response to the Alaskan oil spill: A note on legitimacy theory. Accounting, Organizations and Society, 17(5), 471–475. http://dx.doi.org/10.1016/0361-3682(92)90042-Q
Philosophov, L. V., & Philosophov, V. L. (2005). Optimization of a firm’s capital structure: A quantitative approach based on a probabilistic prognosis of risk and time of bankruptcy. International Review of Financial Analysis, 14(2), 191–209. http://dx.doi.org/10.1016/j.irfa.2004.06.010
Piotroski, J. D. (2007). Discussion of the book-to-price effect in stock returns: Accounting for leverage. Journal of Accounting Research, 45(2), 469–479. http://dx.doi.org/10.1111/j.1475-679X.2007.00241.x
Porter, D. C. (2010). Essentials of econometrics: McGraw-Hill/Irwin.
Purnamasari, P., & Umiyati, I. (2024). Greenwashing and financial performance of firms: The moderating role of internal audit quality and digital technologies. Cogent Business & Management, 11(1), 2404236. http://dx.doi.org/10.1080/23311975.2024.2404236
Ross, S. A. (1973). The economic theory of agency: The principal’s problem. The American Economic Review, 63(2), 134–139.
Roulet, T. J., & Touboul, S. (2015). The intentions with which the road is paved: Attitudes to liberalism as determinants of greenwashing. Journal of Business Ethics, 128(2), 305–320. http://dx.doi.org/10.1007/s10551-014-2097-8
Sachs, J. D., Lafortune, G., Fuller, G., & Iablonovski, G. (2025). Financing Sustainable Development to 2030 and Mid-Century. Sustainable Development Report 2025. Retrieved from Paris:
Saurabh, K., Rani, N., & Upadhyay, P. (2024). Towards novel blockchain decentralised autonomous organisation (DAO) led corporate governance framework. Technological Forecasting and Social Change, 204. http://dx.doi.org/10.1016/j.techfore.2024.123417
Shahrour, M. H., Girerd-Potin, I., & Taramasco, O. (2021). Corporate social responsibility and firm default risk in the Eurozone: A market-based approach. Managerial Finance, 47(7), 975–997. http://dx.doi.org/10.1108/MF-02-2020-0063
Shakil, M. H., Pollestad, A. J., & Kyaw, K. (2025). Environmental, social and governance controversies and systematic risk: A machine learning approach. Finance Research Letters, 75. http://dx.doi.org/10.1016/j.frl.2025.106894
Shocker, A. D., & Sethi, S. P. (1973). An approach to incorporating societal preferences in developing corporate action strategies. California Management Review, 15(4), 97–105. http://dx.doi.org/10.2307/41164466
Swiss Confederation. (2025). Supplement to Switzerland’s Long-Term Climate Strategy – NDC 2031–2035. Retrieved from https://unfccc.int/sites/default/files/resource/Supplement_Switzerland_Long_Term_Climate_Strategy_for_NDC_2031-2035_en.pdf
Testa, F., Miroshnychenko, I., Barontini, R., & Frey, M. (2018). Does it pay to be a greenwasher or a brownwasher? Business Strategy and the Environment, 27(7), 1104–1116. http://dx.doi.org/10.1002/bse.2058
Truong, Q. T., Tran, Q. N., Srivuttichan, T., & Chen, R. (2025). The significance of ESG performance for financial distress: New evidence. Applied Economics Letters, 1–7. http://dx.doi.org/10.1080/13504851.2025.2471553
Velte, P. (2025). Corporate Social Responsibility (CSR) Decoupling and Tax Avoidance: Symbolic Use of Sustainable Boards in the European Union? Corporate Social Responsibility and Environmental Management, 32(3), 4179–4193. http://dx.doi.org/10.1002/csr.3172
Viana, D. B. C., Lourenço, I. M. E. C., & Paulo, E. (2022). The effect of IFRS adoption on accrual-based and real earnings management: emerging markets' perspective. Journal of Accounting in Emerging Economies, 13(3), 485–508. http://dx.doi.org/10.1108/jaee-05-2021-0172
Vives, A. (2008). Corporate Social Responsibility: The role of law and markets and the case of developing countries. Chicago-Kent Law Review, 83(1).
Walker, K., & Wan, F. (2012). The harm of symbolic actions and green-washing: Corporate actions and communications on environmental performance and their financial implications. Journal of Business Ethics, 109(2), 227–242. http://dx.doi.org/10.1007/s10551-011-1122-4
Wang, Z., & Tian, X. (2025). From Greenwashing to Sustainability: The Mediating Effect of Green Innovation in the Agribusiness Sector on Financial Performance. Agriculture, 15(12). http://dx.doi.org/10.3390/agriculture15121316
Wolniak, R. (2016). Relations between corporate social responsibility reporting and the concept of greenwashing: Zeszyty Naukowe. Organizacja i Zarządzanie/Politechnika Śląska.
Xu, M., Tse, Y. K., Geng, R., Liu, Z., & Potter, A. (2025). Greenwashing and market value of firms: An empirical study. International Journal of Production Economics, 284. http://dx.doi.org/10.1016/j.ijpe.2025.109606
Yang, Z., Nguyen, T. T. H., Nguyen, H. N., Nguyen, T. T. N., & Cao, T. T. (2020). Greenwashing behaviours: Causes, taxonomy and consequences based on a systematic literature review. Journal of Business Economics and Management, 21(5), 1486–1507. http://dx.doi.org/10.3846/jbem.2020.13225
Zahid, R. M. A., Khan, M. K., Anwar, W., & Maqsood, U. S. (2022). The role of audit quality in the ESG-corporate financial performance nexus: Empirical evidence from Western European companies. Borsa Istanbul Review, 22, S200–S212. http://dx.doi.org/10.1016/j.bir.2022.08.011
Zeng, F., Wang, J., & Zeng, C. (2025). An optimized machine learning framework for predicting and interpreting corporate ESG greenwashing behavior. PLoS One, 20(3). http://dx.doi.org/10.1371/journal.pone.0316287
Zhang, D. (2022). Are firms motivated to greenwash by financial constraints? Evidence from global firms’ data. Journal of International Financial Management & Accounting, 33(3), 459–479. http://dx.doi.org/10.1111/jifm.12153
Zhang, L., Li, D., Cao, C., & Huang, S. (2018). The influence of greenwashing perception on green purchasing intentions: The mediating role of green word-of-mouth and moderating role of green concern. Journal of Cleaner Production, 187, 740–750. http://dx.doi.org/10.1016/j.jclepro.2018.03.201
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Seyfullah Selimefendigil
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.
This work is licenced under a 
