ABSTRACT: Previous research has highlighted that external factors such as government environmental regulations, environmental taxes, and social pressure can influence corporate greenwashing. However, the impact of the judicial environment, as a crucial external governance mechanism, has not been fully explored. The establishment of Circuit Courts by the Supreme People's Court significantly improved the quality of local judiciary, providing a favorable quasi-natural experimental setting for our study. Given that the Circuit Courts were first established in 2015, we select Chinese A-share listed companies from 2010 to 2020 as our research sample to ensure a balanced time window. After a series of data-cleaning steps, we obtain 10,364 firm-year observations. We treat the establishment of Circuit Courts as an exogenous shock that represents the strengthening of the rule of law and employ a DID model to identify its impact on corporate greenwashing. Greenwashing ( GW ) is measured as the gap between qualitative and quantitative disclosures of environmental liabilities in firms' annual reports, indicating the degree of information embellishment. Strengthening the rule of law ( Reform ) equals 1 if a firm's province was covered by the Circuit Courts by June 30 of a given year, and 0 otherwise. The results show that the Circuit Courts play a crucial role in curbing greenwashing. Specifically, the Circuit Courts lead to a 0.053 reduction in the greenwashing index, representing a 14.209% decrease relative to the sample mean, indicating a substantial mitigating effect. Further analysis reveals that the Circuit Courts reduce greenwashing by increasing the environmental risks faced by firms and alleviating firms' financing constraints. The effect is particularly pronounced among firms with lower environmental investments, those belonging to polluting industries, and those located in provinces with underdeveloped financial markets. In addition, the Circuit Courts' role in curbing greenwashing also improves the overall quality of corporate information disclosure. Our study offers important practical implications for policymakers in emerging markets, where legal systems are often underdeveloped and the enforcement of environmental regulations remains weak. The results indicate that strengthening the rule of law can effectively curb corporate greenwashing, with significant implications for both environmental governance and public trust in environmental protection. Therefore, governments should prioritize improving the fairness and efficiency of local judicial systems, strengthening the judiciary's role in environmental governance, and encouraging firms to fulfill their environmental protection responsibilities.
Cao et al. (Thu,) studied this question.