RESEARCH ON THE RELATIONSHIP BETWEEN ENVIRONMENTAL PERFORMANCE AND FINANCIAL PERFORMANCE IN LISTED FIRMS IN EMERGING EAST ASIA

Abstract

The study investigates the non-linear relationship between environmental performance and financial performance in listed firms in emerging East Asia. We adopt a multidimensional aggregate construct of environmental performance that focuses on three major environmental areas including emission reduction, product innovation, and resource reduction. We find empirical evidence of a U-shaped relationship between environmental performance and financial performance measured by return on assets. Accordingly, an increase in environmental performance deteriorates financial performance in the beginning, but after its threshold has been reached, the effect reverses and environmental performance ultimately serves profitability. The most important implication for practitioners is the promotion of corporate environmental protection to enhance financial performance in the long term.