Firms’ Environmental and Financial Performance: An Empirical Study

12 Pages Posted: 7 Jul 2009  

Ran Zhang

Rensselaer Polytechnic Institute (RPI) - Department of Economics

David I. Stern

Australian National University (ANU) - Crawford School of Public Policy

Date Written: December 31, 2007

Abstract

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

Zhang, Ran and Stern, David I., Firms’ Environmental and Financial Performance: An Empirical Study (December 31, 2007). FEEM CSR PAPER 19.2007. Available at SSRN: https://ssrn.com/abstract=1429886 or http://dx.doi.org/10.2139/ssrn.1429886

Ran Zhang

Rensselaer Polytechnic Institute (RPI) - Department of Economics ( email )

110 8th Street
Troy, NY 12180
United States

David I. Stern (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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