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Does Environmental Investment Really Contribute to Firm Performance? An Empirical Analysis Using Japanese Firms

Eri Nakamura ()

Eurasian Business Review, 2011, vol. 1, issue 2, 91-111

Abstract: The purpose of our study is to investigate the effect of environmental investment on firm performance. It is believed that a firm can increase its economic performance by strengthening the trust of consumers and shareholders through environmental investment. Our study makes the following three contributions. First, we consider ex ante firm environmental protection efforts rather than ex post environmental performance. As far as we limit our discussion to posterior performance, we cannot consider whether a firm can improve its economic performance while it makes efforts for environmental protection. Second, we examine the effects of environmental investment both in the short term and in the long term. Although previous studies rarely consider the effects of environmental effort in the long term, there is no evidence to assume that environmental efforts have a static role in future performance. Moreover, there can be a time lag between the investment and the social recognition of firm effort. Third, we not only use observed environmental investment of large firms but also estimate the unobserved data of small and medium firms to generalize our discussion. Using an ordinary least squares (OLS) regression with a data set of 3,237 Japanese firms, we obtain the following results. First, in the short term, environmental investment does not affect firm performance significantly. Second, in the long term, environmental investment increases firm performance significantly. This suggests that there is a time lag between investment and firm valuation according to consumers and shareholders. However, this positive effect of environmental investment disappears in the next period. Copyright Eurasia Business and Economics Society 2011

Keywords: Environmental investment; firm performance; profitability; environmental management; Japanese firm; OLS regression (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:spr:eurasi:v:1:y:2011:i:2:p:91-111