Does greenwashing pay off? An investigation to the relationship between environmental decoupling and cost of debt

Due to growing climatic concerns, external stakeholders are requiring firms to engage in environmentally responsible activities more than ever. However, due to varying regulations of sustainability disclosures across countries and industries, firms may engage in greenwashing by not reporting, hiding, or exaggerating their actual practices. A gap between firm external and internal environmental actions is referred to as environmental decoupling or greenwashing. Albeit the existing evidence on the impact of such decoupling on financial markets, the reaction of debt markets to greenwashing largely remains unexplored. This study fills this void by analyzing the data of 3810 pubic bonds and 5847 bank loans from publicly listed US firms for the 2003-2017 period. The results reveal a positive relationship between the environmental decoupling and the cost of public bonds. This relationship is more pronounced in firms with an opaquer information environment. However, the relationship between greenwashing and the cost of bank loans is relatively weaker. These findings call policymakers' attention to regulate and standardized disclosure practices and suggest fund managers also depend on private or non-public channels to acquire decision-useful information.