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The moderating effects of environmental risk of the industry on the relationship between corporate environmental and financial performance

Natalia Semenova (School of Business and Economics, Umeå University, Umeå, Sweden)
Lars G. Hassel (School of Business and Economics, Umeå University, Umeå, Sweden)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 8 February 2016

1902

Abstract

Purpose

Industries differ in their environmental impacts, such as emissions, water and energy use, fuel consumption and hazardous wastes, which will have implications for how environmental performance translates to operating performance and market value at company level. By incorporating industry-specific differences of environmental impacts, this paper includes industry-level environmental risk as a moderating factor on the relationship between two indicators of corporate environmental performance (CEP) (management and policy) and corporate financial performance (profitability and market value). The paper aims to discuss these issues.

Design/methodology/approach

Using panel data of US companies across all industries, the paper empirically tests a regression model, which includes an interaction effect representing both the form and strength of dependency of CEP on the environmental risk of the industry. The paper adopts the natural resource based theory to argue that financial returns are a decreasing function of CEP in high environmental impact industries, where environmental spending beyond compliance is costly and there is not much opportunity for consumer orientation.

Findings

The results show that environmental management has different impacts on operating performance at high and low environmental risk of the industry (form of relationship) while environmental policy (reporting) has a stronger signal on market premium in industries with low rather than high environmental risk (strength of relationship). Differences in both form and strength of moderating effects are demonstrated.

Research limitations/implications

Further research can introduce other industry-specific moderating factors, such as the disclosure maturity of the industry and the institutionalization of environmental disclosures across boarders in the industries, in order to explore the complexity of the relationship.

Practical implications

The results of the paper are relevant to investors, company managers and a broad group of stakeholders when considering both industry- and company-level environmental risks.

Originality/value

Previous studies have relied on controlling for industry membership. This paper uses an industry-specific environmental variable, environmental risk of the industry, to examine the form and strength of moderating effects.

Keywords

Acknowledgements

The authors would like to thank Mistra, the Foundation for Strategic Environmental Research, for the financial support. Global Engagement Services (GES) made this study possible by providing the environmental risk ratings of US companies.

Citation

Semenova, N. and Hassel, L.G. (2016), "The moderating effects of environmental risk of the industry on the relationship between corporate environmental and financial performance", Journal of Applied Accounting Research, Vol. 17 No. 1, pp. 97-114. https://doi.org/10.1108/JAAR-09-2013-0071

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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