ABSTRACT
The study examined the effect of environmental cost on corporate performance of listed manufacturing firms in Nigeria. The specific objectives examined the effect of environmental cost on return on equity, return on asset and Tobin of listed manufacturing firms in Nigeria. The study employed the use of Ex-Post Facto research design and content analysis. A Simple linear regression was used to analyse the data collected from the listed manufacturing firms. The result revealed that; Environmental cost had a positive significant effect ( p.value of 0.0466 which is less than 0.05 ) on return on equity and ( p-value of 0.0000, which is less than 0.05) on return on asset of listed manufacturing firms in Nigeria and both indicates that the test is statistically significant at 5% level. The result also revealed that environmental cost had no significant effect (p-value of 0.6475, which is greater than 0.05) on Tobin Q of listed manufacturing firms in Nigeria and this indicates that the test is statistically insignificant at 5% level. The study therefore recommended that firms in Nigeria should invest reasonable amount on environmental issues and report same in their financial reports for the various stakeholders to see. This will create a good relationship with the host community which will enable growth in production and increase in turnover, this is as a result of the positive relationship of environmental cost disclosure on return on asset and equity. Again, the Financial Reporting Council of Nigeria (FRC) and others alike should make environmental cost reporting a mandatory report as this can help compel the firms to engage in environmental conservation activities that will mitigate the adverse effect of their business activities on the host communities. As a result, this will lead to a conducive business operating environment and increase in profitability.
TABLE OF CONTENTS
Title i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
List of Tables viii
Abstract ix
CHAPTER 1:
INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 4
1.4 Research Questions 5
1.5 Research Hypotheses 5
1.6 Significance of the Study 5
1.7 Scope of the Study 7
1.8 Limitations of Study 7
CHAPTER 2: REVIEW OF RELATED LITERATURE 9
2.1 Conceptual Framework 9
2.1.1 Concept of environmental disclosure 9
2.1.2 Components of environmental cost disclosure 12
2.1.2.1 Environmental restoration cost 13
2.1.2.2 Environmental fines and penalties 14
2.1.2.3 Environmental donations and sponsorship 14
2.1.2.4 Environmental compensation cost 15
2.1.2.5 Environmental waste management cost 16
2.1.3 An overview of corporate performance 17
2.1.4 Environmental cost disclosure and corporate
performance 18
2.2 Theoretical Framework 20
2.2.1 Voluntary disclosure theory 20
2.2.2 Legitimacy theory 21
2.2.3 Stakeholder theory 24
2.3 Empirical Review 29
2.4 Gap on Reviewed Literature 48
CHAPTER 3: METHODOLOGY 50
3.1 Research Design 50
3.2 Population of the Study 50
3.3 Sample Size and Sampling Techniques
50
3.4 Source of Data 51
3.5 Model Specification 51
3.6 Definition of Variables
52
3.6.1 Independent variables 52
3.6.2 Dependent variables 52
3.6.3 Control variables 52
3.7 Data Analysis Technique 52
CHAPTER 4: DATA
PRESENTATION AND ANALYSIS 53
4.1 Data Presentation 53
4.2 Data Analysis 53
4.2.1 Descriptive statistics 53
4.2.2 Correlation analysis 55
4.2.3 Unit root test 56
4.2.4 Co-integration test 58
4.2.5 Test of constant variance 61
4.3 Test of Hypotheses 63
4.4 Discussion of Findings 65
CHAPTER 5: SUMMARY OF
FINDINGS CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 67
5.2 Conclusion 67
5.3 Recommendations 68
5.4 Contribution to Knowledge 69
REFERENCES 70
APPENDICES
LIST
OF TABLES
2.3:
Summary of Empirical Review 46
3.1:
Summary of Independent and Dependent Variables 52
4.1: Descriptive Statistics 54
4.2: Correlate Retoe Retoa Tobin Fsize Lencost (obs=232) 56
4.3: Result of Panel Unit Root Tests For The Variables 55
4.4: Cointegration Test - Engle-Granger 57
4.5: Co-integration Test - Engle-Granger 59
4.6: Co-integration Test - Engle-Granger 60
4.7: Model 1 Heteroskedasticity Test: White 61
4.7.1: Heteroskedasticity Test: white 63
4.7.2: Heteroskedasticity Test: white 64
CHAPTER
1
INTRODUCTION
1.1
BACKGROUND
TO THE STUDY
Over the past decades, international
conferences have been held to assess the problems of the global environment
issues and more importantly, to suggest corrective measures to such issues. The
aim of these conferences is to create a basis for comprehensive consideration
in line with the United Nation agenda on the problem of human environment
depletion caused by human activities and to focus the attention of governments,
private firms, individuals and the public on the importance and need to tackle
this environmental problem (Bassey, Effiok & Eton, 2013). An example of
such conference is The United Nations Conference on Environment and Development
in June 1992 and The United Nation Conference on Sustainable Development in
June 2012, both conferences took place in Rio de Janeiro, Brazil. Activities of
business organizations especially those in the manufacturing sector have led to
such environmental pollutions (Damian, 2006). Also, unsustainable use of
natural resources by the firms has caused increase in the emission of
greenhouse gases in our society. This consequently results in depletion of the
ozone layer and global warming. As a result of this, the role of companies in
addressing environmental and sustainability issues is deemed very vital (Adams
& Busola 2017).
Sequel
to the global awareness on environmental issues, firms have come under intense
pressure to meet up with the requirements of the current generations without
compromising the capacity of the subsequent generations by engaging in
environmental engineering activities which has led to additional cost on them
(Deegan, 2002). Hence, firms are expected to show accountability of their
conducts and activities that took place in the society and the natural
atmosphere. However, it is worth taking into consideration by organizations
that being environmentally responsible will increase costs to the organization
which in turn reduces the level of company’s financial performance (Nadeem, M., Zaman and R., Roudaki, J. 2018).
Environmental costs have been expanded to account for product design for
sustainability, recycling and disassembly; process design to reduce environmental
impact of operations; worker training; research and development. The various
government regulations, societal pressure groups and green consumer pressure
are some of the current trends and recent developments reawakening corporate
attention to the strategic and competitive role of a firm’s environmental
responsibility to corporate performance (Ifurueze, Lyndon & Bingilar,
2013). Although voluntary, financial reports of firms that are without adequate
disclosure of environmental cost information may be seen to be incomplete.
Commitment to the natural environment has become an important variable
(Unamuno, 2006) and behaving in a socially responsible manner is increasingly
seen as essential to the long term survival of companies (Adams and Zutshi,
2004). This
is because failure to include environmental cost information in financial
reports might affect the ability of various stakeholders of the firm to make
sound decisions.
According
to Bassey, Effiok and Eton (2013) environmental accounting is referred to the
way and manner by which firms communicate the environmental effects of their
activities and how they have tried to resolve it in the best interest of all
relevant stakeholders. Deegan(2002) further stated that, firms through the
process of communication of environmental accounting information might seek to
influence the public’s perception towards their operations and create a good
image.
Firms’ also incur environmental costs by contributing
to both corporate public relations and media campaigns on environmental issues.
Also, being environmentally responsible may direct firms to better resources
and increase their employee’s motivation which results in creation of
unforeseen opportunity within the organization. When environmental costs are not
adequately allocated by firms, cross-subsidization occurs between products
(United Nation General Assembly 2015). Most companies do not know the extent to
which their environmental cost information can influence their performance and
thus tend to underestimate them. This means that if they are not assessing such
information it implies that they are not monitoring and reporting them.
Manufacturing firms in Nigeria need to be fully accountable for the true cost
of the impact of their activities on the environment which in so doing will put
them in the good books of other stakeholders and will have an effect on their
corporate performance.
1.2 STATEMENT
OF THE PROBLEM
During the 19th and 20th century
people all over the world, become more concerned about the quality of their
environment. Well known environmental tragedies, like the cause of mercury
poisoning in mina mate (Japan), Bhopal chemical leak (India), Exxon Valdes oil
spill in (Alaska - USA), severe smoke pollution episode in London (UK) and
massive oil spill caused by Terry Canyon accident, all this have significantly
increase the global profile of environmental issues and have reinforced in
people’s mind the sense that the quality of air, water and a wide range of
natural resources was being seriously degraded. As a result, there became a
need for manufacturing firms to be environmentally responsible (Bassey, Effiok
and Eton 2013). Notwithstanding, most firms in Nigeria are seen to be
environmentally irresponsible as their financial report are found not to be disclosing
information relating to the cost of environmental hazards affecting the society
as a result of their activities. This is because the firms are not aware of the
effect of such cost disclosures on their financial performance. (Nadeem, M., Zaman and R., Roudaki, J. 2018).
Several studies have been
carried out by different authors on environmental cost and corporate
performance by developed economies and emerging economies but it seems a
conclusion is yet to be reached. Susi (2009); While, De Villiers and Staden (2010); Galani et al. (2011) all carried out
their studies on environmental cost disclosure and corporate performance using
content analysis and found out mixed results on environmental cost disclosure in the annual
reports of firms and corporate performance.
Uwalomwa, (2011); Eyo, (2013);
Ajibolade and Uwalomwa, (2013) used the mixture of both survey and regression
research design to explain the effect of environmental cost disclosure on
corporate performance of firms and they too found out mixed results.
As a result of the methodology employed by past
authors and their mixed results, this study will assess the effect of
environmental cost on corporate performance of firms in Nigeria using both
content analysis and regression research design to see if results now conforms
with that of past authors.
1.3
OBJECTIVES OF THE STUDY
The main objective of the study was to
examine effect of environmental cost on corporate performance of listed
manufacturing firms in Nigeria. The specific objectives included are;
i.
examine
effect of environment cost on return on equity of listed manufacturing firms in
Nigeria.
ii.
determine
effect of environment cost on return on asset of listed manufacturing firms in
Nigeria.
iii.
ascertain
effect of environment cost on Tobin-Q of listed manufacturing firms in Nigeria.
1.4 RESEARCH QUESTIONS
The
following were the research questions for this study;
i.
What
is the effect of environment cost on return on equity of listed manufacturing
firms in Nigeria?
ii.
To
what extent does environment cost affect return on asset of listed
manufacturing firms in Nigeria?
iii.
To
what extent does environment cost affect the Tobin-Q of listed manufacturing
firms in Nigeria?
1.5
RESEARCH HYPOTHESES
The researcher formulated the following research
hypotheses;
H01: Environmental
cost has no significant effect on return on equity of listed manufacturing
firms in Nigeria.
H02: Environmental
cost has no significant effect on return on asset of listed manufacturing firms
in Nigeria
H03: Environmental
cost has no significant effect on the Tobin Q of listed manufacturing firms in
Nigeria.
1.6 SIGNIFICANCE
OF THE STUDY
This study will be of great
importance and benefit to the following stakeholders;
Management: Managers of firms will understand better the need to adhere
to strict environmental protection practices that will enable sustainable
business practices and friendly business cum environmental relationship that
will enhance continua performance and profitability.
Investors: Already existing investors will be made to understand the
need to pay key attention to the various components of environment cost
disclosure and how they affect their firm financial performance. The study will
enable them have informed knowledge as to support the environmental activity
policies of the firm in line with global best practices to assess the financial
performance of the firm. In addition, potential investors who are concerned
about environmental protection shall be made to know how the firms carry out
their activities in line with environmental best practices in order to help
them make investment decision.
Government: The government will be made to know the importance of
contributing to policies that enhance global environmental practices such that
the firms will not violate extant laws meant to protect the globe. Also,
through this study the government will understand the need to put in place
environmental fines such that firms will be guided on how they go about their
business production activities.
Academics: The students, academia and other prospective researchers
who desired to carry out further research on similar related topics will find
this study of immense important in the sense that it will serve as a reference
point. Also this study will add to the already existing literatures and will
enrich the literatures on the environmental cost disclosure and financial performance
of firms.
1.7 SCOPE
OF THE STUDY
The
scope of this study is limited to the listed manufacturing firms in Nigeria.
This sector is specifically taken into consideration as one of the sector that
has been seen as an emerging force in Nigerians economy given the prevailing
turn around in infrastructural development strides of the current
administration, which they intend to make Nigeria a self-dependent nation with
high productive capacity in all aspect. The high demand for local manufactured
goods products are in high demand and the production consequently has risen
which as a result will lead to high environmental activities. The scope of this
study in relation to time covers a period of 8 years, between 2011 to 2018 and
in relation to geographical location involves firms in the urban areas of
Nigeria with environmental activities. This is done to capture the period when
global environmental protection awareness became so pronounced and firms in
Nigeria keyed into the cost disclosure. In addition, it covers the period
before the current Nigerian administration and the current period so as to
inculcate environmental policy enforcement, which is more pronounced in the
current administration to make comprehensive findings on the effect of
environmental cost on corporate performance in a high production driven
economy.
1.8
LIMITATIONS OF THE STUDY
Although
this study was scientifically carried out, there are still potential
limitations of the study that should be taken into consideration.
The current research is restricted only to the listed
manufacturing firms. Furthermore, this research was mainly conducted based on
the secondary data collection. The other data collection methods had not been
considered. As a result, they may not be 100% accurate. In addition to these,
data representing the period of 2011 to 2018 were used for the study. The
research has compiled a large database of listed manufacturing firms accounting
data that demonstrate what can be done even with the limitations of currently
available data.
More so, the data used in this study were prepared on a
historical basis, which is one of fundamental problem associated with presenting
accounting information. This thus makes it impossible for current causation to
be inferred. However, the use of regression analysis which tries to establish
causation effect between the dependent and independent variables in the
analysis of data helped to validate this study’s findings to greater extent.
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