Environmental strategy and firm performance: A new methodological proposal

Abstract

Environmental strategies and their effects on firm performance are receiving increased attention in the literature, but the results are inconclusive. To fill this gap, we propose to evaluate the effect of environmental strategies on firm performance, thereby making two significant contributions. The first is the use of Bayesian techniques to estimate a stochastic frontier model with random coefficients to evaluate the relationship between environmental strategies and performance at the individual firm level, thus adequately incorporating heterogeneity; the second is the adoption of profit efficiency as a measure of firm performance. To test this idea, we studied the effect of a set of pollutants on profit efficiency in a sample of livestock firms in Spain. The results reveal that i) the success of environmental strategies depends on the properties and internal characteristics of each firm and the environment in which it operates and ii) the mean efficiency is 55.80%, which implies that these firms are losing on average 44.20% of their maximum potential profit. These results have significant strategic implications for firms' ability to achieve a competitive advantage.