Corporate environmental responsibility and financial performance: Does bidirectional causality work? Empirical evidence from the manufacturing industry

Purpose. Over the past two decades, scholarly attention has focused mainly on a direct and inverse relationship between corporate environmental responsibility (CER) and corporate financial performance (CFP). In this study, we explore the bidirectional causality hypothesis, as good environmental results can lead to good financial results, which makes it possible to invest more resources in projects that improve environmental performance. Design/methodology/approach. We test the bidirectional causality between CER and CFP on a sample of listed Italian manufacturing firms over the 2005-2014 period. We use a fixed effect panel data regression and check the robustness of our results with alternative econometric techniques. Findings. Although our findings do not support bidirectional hypothesis, they establish direction/causality from CFP to CER. As a result, environmental responsibility is a consequence of prior financial performance, which supports the slack resources hypothesis. Research implications. Given that companies’ environmental commitment is dictated by economic evaluations or by assessing the availability of resources to invest, it seems that the spread of environmentally responsible behaviours might be supported by different external pressures. Originality/value. The paper provides further insights on sustainability management literature by establishing a bidirectional relationship between firm performance and environmental responsibility.