The Relationship between Corporate Environmental Effort and Financial Performance: Focusing on Logistics Industry

Abstract

Environmental disclosures entail costs, yet increasingly, large listed firms are making higher and better quality disclosures. The purpose of this study is to examine the link between a firm’s environmental effort and financial performance. Specifically, this study investigates the direction of the casual relationship between the environmental disclosures and return on sales in logistics industry. Drawing on literature streams in socio-political theory, legitimacy theory, resource-based view, and voluntary disclosure theory, this study develops and tests the Ganger casualty model of relationships between constructs that form the basis of the proposed theories. Conducting an empirical study of 154 Korean listed firms in logistics industry, this study provides empirical evidences for the direction of the casual relationship between environmental effort and financial performance. Empirical results of this study show that past profitability drives current environmental disclosures. Further analysis reveals that firms that make higher financial performance have higher environmental effort. These findings are consistent with the voluntary disclosure theory and the resource based view of the firm, suggesting that firms with greater economic resources make more extensive environmental disclosures which yield net positive profitability.