Watchdogs or Enablers? Analyzing the Role of Analysts in ESG Greenwashing in China

Abstract

In this study, we investigate whether analysts in China can effectively function as watchdogs to monitor managerial ESG greenwashing practices or if they inadvertently play a role in fostering such practices. Analyzing a sample of 8498 annual records from 1282 firms listed on the Chinese A-share market from 2012 to 2022, our linear regression analysis in Stata reveals that firms with significant analyst coverage are more prone to ESG greenwashing, even after controlling for firm-level variables such as leverage (Lev), return on assets (ROA), and cash flow. This finding supports the analyst pressure hypothesis. Notably, the effect is particularly pronounced in poorly performing firms but diminishes when star analysts are involved. Furthermore, we examine the moderating effect of corporate reputation on the relationship between analyst coverage and ESG greenwashing. The results indicate that a robust firm reputation amplifies the impact of analyst scrutiny on ESG greenwashing, especially by raising stakeholder expectations. Our aim is not to undermine the role of analysts but to highlight the need for strengthened ESG regulations to enhance analyst oversight and reduce ESG greenwashing. While our findings, influenced by their Chinese context, may not be universally applicable across all regions, they offer valuable insights for emerging markets seeking to implement effective ESG practices.