Impact of interaction between corporate environmental responsibility and corporate financial performance: the moderating effects of environmental regulation and internal control

Abstract

ABSTRACT This paper investigates the interaction between corporate environmental responsibility (CER) and corporate financial performance (CFP). Moreover, the moderating effect of environmental regulation and internal control on this relationship is also examined. Based on the panel data of 790 China’s A-shares listed companies of heavily polluting industries from 2006 to 2019, the results show that while CFP has a significant positive impact on CER, the positive impact of CER on CFP is not significant. Further analysis reveals that environmental regulation plays a positive moderating role in the impact of CFP on CER, and the positive impact of CER on CFP become significant in higher internal control quality firms. The results indicate that good environmental performance is a consequence of earlier good financial performance, and the costs of implementing sustainable and responsible projects are not always offset by revenues sufficient to generate increases in profit. Our findings suggest that firms should improve the quality of internal control and government should increase environmental supervision to achieve a virtuous circle connecting CER and CFP.