Impact of financial performance on environmental sustainability in the presence of credit constraints: evidence from Indian manufacturing firms

Can borrowing constraints enhance environmental sustainability? An alternative parametric approach

“…The vast body of empirical EKC literature found such inverted U‐shape association between per capita income and pollution concentrations for a number of pollutants (carbon dioxide by Iwata et al, 2010, and Nasir & Rehman, 2011; carbon monoxide by Khanna, 2002, and Baiardi, 2012; NMVOCs [non‐methane volatile organic compounds] by Baiardi, 2012; suspended particulates; sulphur oxide by Millimet et al, 2003, and Fodha & Zaghdoud, 2010; nitrogen oxide). However, such studies are only confined to the country level, and we could only find that Vasanth et al (2015) and Ghosh et al (2022) investigated the relationship at the firm level. Vasanth et al (2015), in the Indian context, evidenced the impact of financial performance on environmental sustainability, an environmental Kuznets curve (EKC) at the micro level.…”

“…The macro level of sustainable development takes the form of corporate sustainability at the firm level, which are responsibilities of corporations towards the society at large beyond the profitability of the stakeholders. An embodied aspect is the corporate environmental sustainability also referred to as the corporate environmental performance (CEP), which refers to the commitments, practices and processes adopted by firms in terms of resource and energy management, product sustainability and the long‐term promotion, maintenance and improvement of the quality of the natural environment (Ghosh et al, 2022; Jha & Rangarajan, 2020; Sudha, 2020). CEP aligns several corporate strategies through demand‐side management, product stewardship and waste control methods and addresses various environmental issues faced by business and improve the overall quality of the environment (Li et al, 2017).…”

“…This relation between firm performance and environmental sustainability, however, remains ambiguous under circumstances when businesses suffer binding financial constraints as a result of imperfect financial markets that works as a barrier to attaining environmental sustainability (Earnhart & Lizal, 2006; Ghosh et al, 2022; Timilsina et al, 2016). However, existing empirical studies have often failed to focus on the implications of credit constraints that tend to mediate the relationship between financial performance and corporate environmental sustainability (Tian & Lin, 2019; Zhang et al, 2019).…”

“…External financing frictions are often mitigated by increased savings (Shukla & Shaw, 2020), which forces firms to refrain from expensive environmental practices. Firms also assuage their constrained credit position by increasing production and sales through traditional technologies without accounting for their environmental impacts (Ghosh et al, 2022). Thus, the role of credit constraint and its implications for the profitability‐sustainability path across firms need closer exploration.…”

“…The empirical specifications of the existing studies investigating this link (Ghosh et al, 2022; Vasanth et al, 2015) are based on the reduced form parametric model that uses a prior assumption of an underlying distribution and functional form. From a methodological perspective, the major limitation of such a reduced‐form model is the presence of potentially non‐stationary regressors resulting in a non‐linear transformation problem (Bradford et al, 2005).…”