Corporate environmental performance and efficiency: Evidence from stochastic frontier analysis

Abstract

This study provides novel insights into the relationship between corporate environmental performance (CEP) and corporate economic performance as measured by technical efficiency. Using stochastic frontier analysis (SFA) methodology, we find a positive link between CEP and technical efficiency for a sample of U.S. listed firms (from industries that typically raise environmental concerns) in the period 2005–2019. This association is stable over time. Additional tests suggest that such association is non-linear (convex), with high-rated firms presenting disproportionally stronger gains in terms of technical efficiency relative to others. In a different vein, we also show that the strength of the association varies across business sectors, a firm’s size and (historical average) profit margin. The impact of CEP is akin to the ability of firms to cut emissions and/or curb resource use and waste. Surprisingly, environmental product innovation appears to produce negligible effects on technical efficiency.