Exploring U-shaped relationships between Corporate Environmental Management Performance and Corporate Financial Performance (A&C)
This exploratory paper studies whether the relationship between Corporate Environmental Management Performance (EMP) and Corporate Financial Performance (CFP) can be explained by using non-linear U-shaped models and time-lagged measures of EMP. This paper argues that the linear approach that is often used in the literature, has contributed to the mixed results on the relationship in the literature and that the drawn out effects of EMP may have further contributed to the mixed results. By combining existing theories in a new non-linear framework, this paper aims to provide evidence of non-linearity in the relationship between EMP and CFP. Using a panel dataset of yearly data of 1076 public companies for the period 2006-2015, and two measures of CFP, i.e., Total Stock Return (TSR) and Return on Assets (ROA), the results show evidence of non-linearity in the form of a U-shaped relationship between EMP and ROA. Furthermore, although there is some evidence of non-linearity between EMP and TSR, the results of this paper do not support an inverted U-shaped or U-shaped relationship between EMP and TSR. Additionally, this paper does not find evidence that time lagged measures of EMP help in explaining the relationship between EMP and CFP. These findings extend the literature on the EMP-CFP relationship by showing that EMP can have positive or negative effects on ROA, depending on the level of EMP of a firm. In particular, the financial benefits from EMP only seem to appear after a certain threshold of EMP has been reached. The results also show that linear models may not be appropriate for explaining the relationship between EMP and CFP. The paper also supports prior literature by showing that the effect of EMP on CFP is different for different dimensions of CFP. Therefore it is not always possible to generalize conclusions from one measure of CFP to another. In particular, this paper supports the notion that accounting-based measures (ROA) are more, and differently, affected by EMP than market-based measures (TSR) as proposed by Albertini (2013).
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