Firms’ Environmental and Financial Performance: An Empirical Study
12 Pages Posted: 7 Jul 2009
Date Written: December 31, 2007
Recent studies relating corporate environmental performance to financial performance has led to mixed results. The reasons for the inconsistency might be the choice of control variables and environmental performance measurement, etc. In addition, previous studies have been mainly focused on testing the impact of environmental performance to financial performance but did not explain the environmental-financial linkage in both directions. After carefully reviewing these issues, I propose to 1) include the R&D intensity as one of the control variables to avoid misspecification and biased estimates; 2) represent environmental performance by ENV score incorporated in a corporate social index published by KLD Inc.; and 3) test the linkage of environmental and financial performance in both directions. The result in this study shows that the prior financial performance has a small positive impact on current environmental performance while the current environmental performance has a neutral impact on financial performance. This result is intuitively interesting. It suggests that financially well-performed firms tend to invest more in environmental activities; however the environmental efforts are not directly related to the increase in profitability.
Keywords: corporate environmental performance, financial performance
JEL Classification: M14, Q01
Suggested Citation: Suggested Citation