Does Better Environmental Performance Affect Revenues, Cost, or Both? Evidence From a Transition Economy

Abstract

This study analyzes the effect of corporate environmental performance on financial performance in a transition economy. In particular, it assesses whether good environmental performance affects revenues, costs, or both, and if so, in which directions. As environmental performance improves, do revenues rise and costs fall so that profits unambiguously increase? Or vice versa? If both revenues and costs rise (or fall), does better environmental performance improve or undermine profitability? To answer these questions, our study analyzes the links from environmental performance to revenues, costs, and profits using an unbalanced panel of Czech firms from the years 1996 to 1998. The analytical results indicate strongly that better environmental performance improves profitability by driving down costs more than it drives down revenues, consistent with the substantial regulatory scrutiny exerted by environmental agencies and the primary pollution control approach implemented by firms during the sample period.