How does environmental performance affect financial performance? Evidence from Japanese manufacturing firms

Iwata, Hiroki and Okada, Keisuke (2010): How does environmental performance affect financial performance? Evidence from Japanese manufacturing firms.

Abstract

This paper examines the effects of environmental performance on financial performance using the data of Japanese manufacturing firms from 2004 to 2008. As the environmental performance, our study considers the two different environmental issues of waste and greenhouse gas emissions in capturing the effects of corporate environmental management on financial performance. In addition, to clarify how each financial performance responds to a firm’s effort in dealing with different environmental issues, we utilize many financial performance indices reflecting various market evaluations. Our estimation results show the different effects of each environmental performance on financial performances. For example, while an increase in waste emissions generally improves financial performance, their reduction ameliorates financial performance in dirty industries. In addition, while greenhouse gas reduction leads to an increase in return on equity, it does not have a significant effect on return on sales which reflects the evaluation in the goods market, and it leads to a decrease in the natural logarithm of Tobin’s q, which indicates the value of intangible assets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Environmental Performance; Financial Performance; Japanese Manufacturing Firms; Waste Emissions; Greenhouse Gas Emissions
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution ; Water Pollution ; Noise ; Hazardous Waste ; Solid Waste ; Recycling

References

Ambec, S., Lanoie, P., 2008. Does it pay to be green? a systematic overview. Academy of Management Perspectives 22 (4), 45-62.

Blanco, E., Rey-Maquieira, J., Lozano, J., 2009. The economic impacts of voluntary environmental performance of firms: a critical review. Journal of Economic Surveys 23 (3), 462-502.

Butz, C., Plattner, A., 2000. Socially Responsible Investment: A Statistical Analysis of Returns. Bank Sarasin Basic Report, Basel.

Cole, M. A., Elliott, R. J. R., Shimamoto, K., 2006. Globalization, firm-level characteristics and environmental management: a study of Japan. Ecological Economics 59 (3), 312-323.

Cordeiro, J. J., Sarkis, J., 1997. Environmental proactivism and firm performance: evidence from security analyst earnings forecasts. Business Strategy and the Environment 6 (2), 104-114.

Elsayed, K., Paton, D., 2005. The impact of environmental performance on firm performance: static and dynamic panel data evidence. Structural Change and Economic Dynamics 16 (3), 395-412.

Hart, S. L., 1995. A natural-resource-based view of the firm. Academy of Management Review 20 (4), 986-1014.

Hart, S. L., Ahuja, G., 1996. Does it pay to be green? an empirical examination of the relationship between emission reduction and firm performance. Business Strategy and the Environment 5 (1), 30-37.

Hirsch, B. T., Seaks, T. G., 1993. Functional form in regression models of Tobin’s q. Review of Economics and Statistics 75 (2), 381-385.

King, A., Lenox, M., 2002. Exploring the locus of profitable pollution reduction. Management Science 48 (2), 289-299.

Konar, S., Cohen, M. A., 2001. Does the market value environmental performance? Review of Economics and Statistics 83 (2), 281-289.

Mani, M., Wheeler, D., 1998. In search of pollution havens? dirty industry in the world economy, 1960 to 95. Journal of Environment and Development 7 (3), 215-247.

Molina-Azorín, J. F., Claver-Cortés, E., López-Gamero, M. D., Tarí, J. J., 2009. Green management and financial performance: a literature review. Management Decision 47 (7), 1080-1100.

Murphy, C. J., 2002. The Profitable Correlation between Environmental and Financial Performance: A Review of the Research. Light Green Advisors, Seattle.

Nagayama, S., Takeda, F., 2007. An empirical study on the impact of environmentally-friendly news on stock prices in Japan. Global Business and Economics Anthology 1, 129-137.

Nakao, Y., Amano, A., Matsumura, K., Genba, K., Nakano, M., 2007. Relationship between environmental performance and financial performance: an empirical analysis of Japanese corporations. Business Strategy and the Environment 16 (2), 106-118.

Nikkei Digital Media, 2010. NEEDS Financial Quest 2.0. Nikkei Digital Media, Tokyo (online).

Porter, M. E., van der Linde, C., 1995. Toward a new conception of the environment-competitiveness relationship. Journal of Economic Perspectives 9 (4), 97-118.

Rassier, D. G., Earnhart, D., 2010. Does the Porter hypothesis explain expected future financial performance? the effect of clean water regulation on chemical manufacturing firms. Environmental and Resource Economics 45 (3), 353-377.

Russo, M. V., Fouts, P. A., 1997. A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal 40 (3), 534-559.

Salama, A., 2005. A note on the impact of environmental performance on financial performance. Structural Change and Economic Dynamics 16 (3), 413-421.

Sarkis, J., Cordeiro, J. J., 2001. An empirical evaluation of environmental efficiencies and firm performance: pollution prevention versus end-of-pipe practice. European Journal of Operational Research 135 (1), 102-113.

Takeda, F., Tomozawa, T., 2008. A change in market responses to the environmental management ranking in Japan. Ecological Economics 67 (3), 465-472.

Toyo Keizai, 2006. Corporate Social Responsibility Database 2007. Toyo Keizai, Tokyo (in Japanese).

Toyo Keizai, 2007. Corporate Social Responsibility Database 2008. Toyo Keizai, Tokyo (in Japanese).

Toyo Keizai, 2008. Corporate Social Responsibility Database 2009. Toyo Keizai, Tokyo (in Japanese).

Toyo Keizai, 2009. Corporate Social Responsibility Database 2010. Toyo Keizai, Tokyo (in Japanese).

Toyo Keizai, 2010. Kabuka (Stock prices) CD-ROM 2010. Toyo Keizai, Tokyo (in Japanese).

Wagner, M., Van Phu, N., Azomahou, T., Wehrmeyer W., 2002. The relationship between the environmental and economic performance of firms: an empirical analysis of the European paper industry. Corporate Social Responsibility and Environmental Management 9 (3), 133-146.

Walley, N., Whitehead, B., 1994. It’s not easy being green. Harvard Business Review 72 (3), 46-51.

Yamaguchi, K., 2008. Reexamination of stock price reaction to environmental performance: a GARCH application. Ecological Economics 68 (1-2), 345-352.