Greenwash: Corporate Environmental Disclosure Under Threat of Audit

41 Pages Posted: 21 Oct 2006

See all articles by Thomas P. Lyon

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business

John W. Maxwell

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Indiana University, Department of Economics; Richard Ivey School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

We develop an economic model of greenwash, in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We identify conditions under which NGO punishment of greenwash backfires, inducing the firm to become less rather than more forthcoming about its environmental performance. We show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems. Mandatory disclosure rules offer the potential for better performance than NGO auditing, but the necessary penalties may be so large as to be politically unpalatable. If so, a mix of mandatory disclosure rules, NGO auditing and environmental management systems may be needed to induce full environmental disclosure.

Keywords: Greenwash, Disclosure, Environmental Strategy

JEL Classification: D82, G38, K32, L15

Suggested Citation

Lyon, Thomas P. and Maxwell, John W., Greenwash: Corporate Environmental Disclosure Under Threat of Audit (March 2006). Ross School of Business Paper No. 1055. Available at SSRN: https://ssrn.com/abstract=938988 or http://dx.doi.org/10.2139/ssrn.938988

Thomas P. Lyon (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
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John W. Maxwell

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Department of Business Economics and Public Policy
Kelley School of Business, Indiana University
Bloomington, IN 47405
United States
812-855 9219 (Phone)
812-855 3354 (Fax)

HOME PAGE: http://johnwmaxwell.com

Indiana University, Department of Economics ( email )

Wiley Hall
Bloomington, IN
United States

Richard Ivey School of Business ( email )

The University of Western Ontario
1151 Richmond Street North
London, Ontario N6A3K7
Canada
5198502439 (Phone)
5198502306 (Fax)

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