Does Greenwashing Pay Off? Evidence from the Corporate Bond Market

This study investigates whether and how a firm’s greenwashing — the gap between its “green talk” and “green walk” — affects bond pricing. Using 3,810 public bonds issued by U.S. firms, we find a positive relationship between greenwashing and the cost of bonds. We identify the causal relation by using the Federal Trade Commission’s 2012 regulatory intervention to curb misleading environmental claims as an exogenous shock to greenwashing. We also find a more pronounced relation between greenwashing and the cost of bonds for firms whose credit rating is adjacent to the investment/speculative borderline, firms within environmentally sensitive industries, and firms with opaque information environments. Moreover, we show that greenwashing leads to higher environmental litigation costs and a higher chance of rating disagreements among credit rating agencies, thus identifying risk and information channels through which greenwashing increases the cost of bonds. Overall, our results shed new light on the economic consequences of greenwashing through the lens of bondholders