The Effects of Operational Efficiency and Environmental Risk on the Adoption of Environmental Management Practices

Abstract

Given that prior research has provided inconsistent findings on the relationship between financial performance and the adoption of environmental management practices (EMPs), we aim to resolve the inconsistency by positing that the firm may consider different components of financial performance when making decisions. Specifically, we maintain that operational efficiency, measured based on net profit margin, is a key determinant of a firm’s decision to adopt EMPs. Additionally, we aim to examine environmental risk as one contingency that moderates the relationship between operational efficiency and EMP adoption. Employing a firm-fixed effect model to examine the effects of various measures of financial performance, including the net profit margin, return on asset (ROA), return on equity (ROE), and asset turnover, on the adoption rates of EMPs by firms, we find that firms with higher operational efficiency measured based on net profit margin are more inclined to adopt EMPs, while measures such as ROA, ROE, and asset turnover do not demonstrate any substantial effect. This study also finds that while environmental risk increases the possibility of adopting EMPs, it weakens the impact of operational efficiency on the adoption rates of EMPs.