Campus Units

Supply Chain and Information Systems

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

4-2019

Journal or Book Title

International Journal of Production Economics

Volume

210

First Page

56

Last Page

71

DOI

10.1016/j.ijpe.2019.01.016

Abstract

The existing empirical literature on the relationship between corporate sustainability performance and corporate financial performance casts doubt on the direction of this relationship although more studies point out a direction from sustainability to performance. Literature also presents a gap in addressing the mechanism(s) of the relationship that hinders the convergence of the empirical findings and only recently the question of causality is being addressed with modern econometric techniques. We argue that due to the potential endogeneity problem in the relationship, an empirical strategy without a theoretical base may result in inconclusive or misleading conclusions. We address the potential endogeneity problem in the relationship and identify the possible causes of this endogeneity as: (i) firm level heterogeneity in financial returns, (ii) the relationship between firm's productivity level and the marginal cost of sustainability initiatives, and (iii) measurement error. We implement Instrumental Variable (IV) technique to overcome these biases. Our results present empirical evidence to support the hypothesis that corporate sustainability is positively related (possibly causally) with corporate financial performance. We further find that sustainability initiatives are more costly for companies that are more productive; thus, they have less incentive to invest. Finally, measurement error in the sustainability metrics does not play a crucial role.

Comments

This accepted article is published as Soytas, M.A., Denizel, M., Usar, D.D., Addressing endogeneity in the casual relationship between sustainability and financial performance. International Journal of Production Economics, 210(April 2019);56-71. Doi: 10.1016/j.ijpe.2019.01.016. Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version

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