Two essays on corporate greenwashing and financial reporting quality : a thesis presented in partial fulfilment of the requirements for the degree of Master of Business Studies in Accountancy, School of Accountancy, Economics & Finance, Massey Business School, Massey University

Abstract

This thesis comprises two essays examining the intersection between corporate greenwashing and financial reporting quality using a comprehensive panel of U.S. publicly listed firms from 2003 to 2024. As sustainability disclosure has expanded dramatically over the past two decades, concerns about greenwashing, i.e., the strategic misrepresentation of environmental responsibility, have intensified. Yet the relationship between environmental impression management and core attributes of financial reporting remains underexplored. This thesis addresses that gap by investigating how greenwashing interacts with two fundamental dimensions of financial reporting quality: conditional accounting conservatism and earnings management. The first essay examines the relation between conditional accounting conservatism and corporate greenwashing. Drawing on an integrated theoretical framework combining institutional theory and impression management theory, I argue that conservative financial reporting and environmental impression management are not substitutes but complementary responses to divergent institutional pressures across reporting domains. Using the Khan and Watts (2009) C score to measure conditional conservatism and a gap-model-based GW-score to capture the divergence between environmental disclosure and actual environmental performance, I document a positive and statistically significant association between the two constructs. This finding is robust to alternative conservatism proxies, lagged specifications, two-stage least squares (2SLS) instrumental variable estimation, two-stage residual inclusion (2SRI) endogeneity correction, and propensity score matching. The evidence suggests that firms operating under stringent financial reporting discipline retain substantial latitude to engage in environmental impression management through the comparatively unregulated terrain of sustainability disclosure, underscoring a structural decoupling between financial and non-financial reporting governance. The second essay investigates the relationship between earnings management and corporate greenwashing intensity. Grounded in institutional theory and impression management theory, I hypothesize that greenwashing and earnings management represent complementary forms of strategic corporate impression management operating in different reporting domains. I estimate discretionary accruals via both the Modified Jones model and the performance-matched model of Kothari et al. (2005). My baseline results indicate that greenwashing intensity is positively and significantly associated with discretionary accruals across all specifications. I further address endogeneity concerns through lagged regressions, 2SLS, and 2SRI approaches, all of which corroborate my main findings. Cross-sectional analyses reveal that Big 4 audit quality and board diversity unexpectedly strengthen the greenwashing-earnings management nexus. Collectively, the two essays demonstrate that corporate greenwashing is not an isolated public relations strategy but is systematically associated with fundamental attributes of financial reporting. Firms that mislead stakeholders about their environmental performance exhibit both higher conditional conservatism and higher discretionary accruals, suggesting that managers treat financial and non-financial reporting as distinct strategic arenas subject to different incentive structures and monitoring intensities. These findings carry important implications for regulators, investors, and standard setters seeking to improve the integrity of corporate communication across both domains.