U‐shaped relationship between environmental performance and financial performance of non‐financial companies: An empirical assessment

Abstract

This study takes inspiration from the resource-based view theory and two-little of a good thing theory to scrutinize the influence of environmental performance (EP) on the firms' financial performance (FP). This study comes up with different interpretations like initially negative and later on positive impact of EP measured in terms of environmental disclosure score (EDS) on the firms' economic performance measured in terms of Tobin's Q, considering a nonlinear association between them. In order to examine the research hypothesis, static as well as generalized method of moments (GMM)-based dynamic panel data analysis has been used on the selected nonfinancial Indian companies for eleven financial years which commences from 2010 up to 2020. The result in the study confirms a positive U-shaped linkage between EP and FP because firms achieve better and positive FP when the EDS increases continuously and crosses the threshold limit of 36 points in the long run, respectively. The result suggests that managers and investors to be cautious and courageous because EP will generate positive results due to the availability of critical resources and organization discretion in the long run but will harm at the minimum level.

Does corporate social performance improve environmentally adjusted efficiency? Evidence from the energy sector

“…Additionally, regulations require the implementation of practices that reduce the environmental impact of companies in the energy sector. While these regulations may temporarily burden firm performance, they can have positive long-term effects, as noted by Xie et al (2018) from international, Chinese, and Indian multi-sector firm samples, as well as Japanese manufacturing firms (Chen & Ma, 2021;Ghosh et al, 2023;Grassmann, 2021;Hatakeda et al, 2012;Tatsuo, 2010;Trumpp & Guenther, 2017).…”

American Corporate Sustainability and Extra-Financial Performance: Is There an Inverted-U Relationship

“…This pattern arises due to ongoing enhancements in pollution prevention strategies, organizational culture, and stakeholder management, offering the potential for long-term improvements in financial performance. More recently, drawing on Indian companies, Ghosh et al (2023) has attempted to examine the link between financial and extra-financial performance using the generalized method of moments (GMM) estimator. The study's findings validate a positive U-shaped relationship between environmental performance and financial performance.…”