Determinants of Environmental and Economic Performance of Firms: An Empirical Analysis of the European Paper Industry

Abstract

This paper examines the relationship between the environmental and economic performance of firms in the European paper manufacturing industry. Based on panel data, it first investigates the relationship separately, with the analysis based on four hypotheses formulated with regard to country influence, process influence and firm size influence on environmental and economic performance. Hypotheses are tested using pooled regression and a panel regression framework with random firm and temporal effects. The main results of this analysis based on separated regressions are that (i) only for a direct comparison between the UK and Germany, country effects are found to be consistent with the hypotheses, i.e. German firms have better environmental, but worse economic performance than UK firms, (ii) there is a significant sub-sector effect on environmental performance only, (iii) effectively no significant firm size effect can be detected. Subsequent to analysing the relationship separately, the paper estimates the determinants of the relationship between environmental and economic performance using three simultaneous equations systems. It was found that for the system with return on sales as economic performance variable, and an environmental performance index as environmental performance variable, a significant and positive regression coefficient was estimated for the asset-turnover ratio, as well as significant and negative coefficients for the dummy variables representing the industrial and mixed sub-sector. For the system with return on capital employed and the environmental index, significant and positive coefficients were found for the latter, both linear and squared. This last finding fits better with "traditionalist" reasoning about the relationship between environmental and economic performance, which predicts the relationship to be uniformly negative.Economic performance; Environmental performance; Paper industry; Simultaneous equations system; Three-error-components model