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Hart and Ahuja (1996) explores that whether the firms pay to stay green or become profitable by going green and found that it does indeed pay to be green. The ROA and ROE are more dependent upon the reputation of the firm and cost of capital. Poor environmental performance negatively effects the return on equity in S&P 500 firms. The closer the firms get to zero pollution emissions, the more expensive it gets (Hart & Ahuja 1996, p. 32).
The second article is also about how much the firms pay to go green in the industry. There is a relationship between pollution reduction and financial gain but the direction of the relationship wasn’t really understood by the King and Lenox (2001). There was no indication that based on analysis of 652 manufacturing firms in USA that a move to clearer industries can improve the financial performance or not (King & Lenox 2001, p. 15)
Both the articles are similar in the context that they explore relationship between environmental and financial performance. The main idea of both the articles evolves around finding whether the firms should make the investments to lower their firm’s environmental impact to gain profitability in future.
The main difference between the studies is that Hart and Ahuja (1996) explains that environmental improvements are expenses for the firms as the more it moves to rule out pollution the more expensive it becomes for the firm. While the study by King and Lenox (2001) provided no evidence that firms with the highest environmental performance tend to experience better financial performance.
Pollution precedes the poor financial performance by one or two years and the result is not immediate. The firm’s performance cannot be judged immediately and the effects are lagged.
Does any underlying characteristic of the firm has to do anything with environmental performance and financial performance?
Hart, S. L. & Ahuja, G., 1996. Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business strategy and the Environment, 5(1), pp. 30-37.
King, A. A. & Lenox, M. J., 2001. Does it really pay to be green? An empirical study of firm environmental and financial performance: An empirical study of firm environmental and financial performance. Journal of Industrial Ecology, 5(1), pp. 105-116.