Strategic Environmental Deception

Abstract

This study investigates the strategic use of deceptive environmental disclosures by firms to obscure their real environmental risks, with the aim of receiving capital market rewards. By leveraging a novel measure that aggregates deceptive linguistic features, I find that firms with higher pollutions tend to exhibit higher levels of environmental deception. This tendency is more pronounced among firms that are more profitable and experience higher growth. Unexpectedly, my analysis reveals that this deceptive disclosure strategy is accompanied by greater opacity in financial reporting, which facilitates short-term benefits. However, these benefits tend to diminish as investors become more informed.

Keywords: deception, environmental disclosure, environmental risk, short-term benefits JEL codes: G30, G23, G30, M14, M40