ABSTRACT Although existing studies suggest that firms engage in ESG greenwashing under performance shortfalls, little is known about how such behavior evolves as underperformance duration increases. Drawing on the behavioral theory of the firm, this study examines how underperformance duration shapes firms' ESG greenwashing behavior. We argue that ESG greenwashing initially increases because firms may view early underperformance as temporary fluctuations and rely on ESG greenwashing to manage external evaluations. However, persistent underperformance reduces the effectiveness of ESG greenwashing and weakens firms' incentives to continue such behavior. Using panel data from Chinese listed firms from 2012 to 2020, we find an inverted U‐shaped relationship between underperformance duration and ESG greenwashing. We further show that this relationship is contingent on the external governance environment: high audit quality strengthens the inverted U‐shaped relationship, whereas media legitimacy attenuates it. Overall, this study shows that ESG greenwashing functions as a temporally dynamic symbolic response that changes with underperformance duration.
Li et al. (Tue,) studied this question.