This paper examines how incentive withdrawal signals embedded in environmental subsidies help curb corporate greenwashing. Drawing on information asymmetry theory, we develop a signaling model that captures the strategic interaction between greenwashing and subsidy allocation and validate it using evidence from Chinese firms. We find that greenwashing reduces environmental subsidies by 0.602 %, primarily through two mechanisms: unfulfilled presubsidy environmental commitments and negative spillovers from external evaluations. Positive information disclosure, in turn, enhances government trust. Compared with firms that report strong financial performance or receive favorable external evaluations, poorly performing firms experience larger subsidy reductions of 0.498 %–0.784 % when engaged in greenwashing. These results demonstrate that subsidy withdrawal is an effective tool for governing the “gray area” of greenwashing and underscore the adaptive role of local authorities operating under limited information.
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