ABSTRACT
The study investigates the effect of environmental cost on firm value and financial performance of listed companies in Nigeria (2012-2018. The study is necessitated in order to resolve conflicting issues on whether the environmental costs significantly impact on the firm value and financial performance. The proxies for environmental costs are Research and Development Cost, Community Development Cost, and Employee Health and Safety Cost. The firm value proxies are NAPS, EPS and PER and financial performance proxies are NPM, ROE and ROA. The study uses secondary data sourced from the selected firms’ annual reports and accounts. The researchers adopt descriptive and co relational research design. Secondary data collected were analyzed using panel data regression analysis and e-view 9 statistical package. The result on the twenty five (25) firms purposely selected revealed, among other things, that environmental cost has significant impact on firms value NAPS, while there are no significant impact of environmental cost on EPS and PER of listed firms in Nigeria. It also revealed significant impact of environmental costs on financial performance (NPM, ROA), except on ROE Based on the above results, the study recommends among other things, that Board of Directors of listed firms in Nigeria should emphasized on RDC projects by establishing R&D unit, should take EHSC serious through continuous staff training for better performance and there should be collaboration between host communities and listed firms with respect to training and offering scholarships to the youths. It also recommended that Directors of listed firms should request for tax incentive if undertaken laudable projects like construction of roads for the host community. It is suggested that if the above recommendations are taken into consideration, it will go a long way in exposing firms on environmental costs projects that impact on their value and financial performance. Also, it will educate the stakeholders on the expectation from the firms around them.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables xi
List of Figure xiv
Abstract xv
CHAPTER 1: INTRODUCTION 1
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 6
1.4 Research Questions 6
1.5 Research Hypotheses 7
1.6 Significance of the Study 7
1.7 Scope of the Study 8
1.8 Limitation of the Study 9
CHAPTER 2: REVIEW OF RELATED LITERATURE 10
2.1 Conceptual Framework 10
2.1.1 Environment 10
2.1.2 Environmental cost (ENVC) 11
2.1.3 Community development costs (CDC) 13
2.1.4 Research and development cost (RDC) 23
2.1.5 Roles and relevance of R & D investment towards organization growth 15
2.1.6 R & D investment and firm performance 15
2.1.7 Employee health and safety costs (EHSC). 15
2.1.8 Justification for environmental cost accounting 16
2.1.9 Global reporting initiative (GRI) 18
2.2.0 Global reporting initiative (GRI) standards benefits 19
2.2.1 Environmental accounting 20
2.2.2 Firm value (EPS, PER , NAPS) 21
2.2.3 Earnings per share (EPS) 22
2.2.4 Price earnings ratio (PER) . 22
2.2.5 Net assets value per share (NAPS) 24
2.2.6 Firm financial performance 24
2.2.7 Net profit margin (NPM) 25
2.2.8 Return on assets (ROA) 25
2.2.9 Return on equity (ROE) 26
2.3 Theoretical Framework 27
2.3.1 Stakeholder theory 27
2.3.2 Legitimacy theory 29
2.3.3 Triple bottom line (3BL) theory 30
2.4 Empirical Review 31
2.4 Summary and Gap in Literature 68
CHAPTER 3: METHODOLOGY 70
3.1 Research Design 70
3.2 Area of Study 70
3.3 Population of the Study 71
3.4 Sample size and Sampling Technique 71
3.5 Sources and Methods of Data Collection 73
3.6 Operational Measurement of Variables 73
3.6.1 Dependent variables 74
3.6.2 Independent variables 74
3.6.3 Model specification 75
3.7 Techniques for Data Analysis 78
CHAPTER 4:RESULTS AND DISCUSSION 79
4.1 Results 79
4.2 Effect of Environmental Costs on Firm Values 79
4.2.1 Descriptive analysis of the independent variables (CCD, RDC, EHSC) 79
4.2.1.1 Effect of environmental costs on net asset per share (NAPS) 83
4.2.1.2 Descriptive analysis of environmental cost variables and net asset per
share 84
4.2.1.3 Correlation analysis of environmental cost variables and net asset per
share (NAPS) 84
4.2.1.4 Validity test on environmental variables and net asset per share 86
4.2.1.5 Test of hypothesis on the effect of environmental cost variables on net
asset per share 92
4.2.2 Effect of environmental costs on earnings per share (EPS) 95
4.2.2.1 Descriptive analysis of environmental cost variables and EPS 96
4.2.2.2 Correlation analysis of environmental cost variables and EPS 98
4.2.2.3 Validity test on environmental cost variables and earnings per share 99
4.2.2.4 Test of hypothesis on the effect of environmental costs on EPS. 104
4.2.3 Effect of environmental cost on price earnings ratio (PER) 107
4.2.3.1 Descriptive analysis of environmental cost variables and price earnings
ratio 107
4.2.3.2 Correlation analysis of environmental cost variables and price earnings
ratio 110
4.2.3.3 Validity test on environmental cost variables and price earnings ratio. 110
4.2.3.4 Test of hypothesis on the effect of environmental costs on PER. 116
4.3 Effect of Environmental Costs on Financial Performance 118
4.3.1 Effect of environmental cost on net profit margin (NPM) 120
4.3.1.1 Descriptive analysis of environmental cost variables and net profit margin 120
4.3.1.2 Correlation analysis of environmental cost and net profit margin (NPM)
series 123
4.3.1.3 Validity test on environmental cost variables and net profit margin. 124
4.3.1.4 Test of hypothesis on the effect of environmental costs variables on net
profit margin (NPM). 128
4.3.2 Effect of environmental cost on return on equity (ROE) 131
4.3.2.1 Descriptive analysis of environmental cost variables and ROE 132
4.3.2.2 Correlation analysis of environmental cost variables and ROE 133
4.3.2.3 Validity test on environmental cost variables and return on equity. 134
4.3.2.4 Test of hypothesis on the effect of environmental cost on return on equity. 138
4.3.3 Effect of environmental cost and earnings on return on assets (ROA) 141
4.3.3.1 Descriptive analysis of environmental cost variables and ROA 141
4.3.3.2 Correlation analysis of environmental cost variables and returns on assets
(ROA) 143
4.3.3.3 Validity test on environmental cost variables and return on asset. 144
4.3.3.4 Test of hypothesis on the effect of environmental costs on ROA 148
4.4 Discussion of Results 151
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 157
5.1 Summary of Findings 157
5.2 Conclusion 158
5.3 Recommendations 159
5.4 Contribution to Knowledge 160
5.5 Suggestions for Further Study 161
References
Appendices
LIST OF TABLES
2.1 GRI indicators 19
2.2 Summary of empirical review 57
3.1 Sample size 72
3.2 Dependent variables and components 74
3.3 Independent variables and components 75
4.1 Descriptive statistics of independent variables 80
4.2 Descriptive statistics of dependent variables 82
4.3 Descriptive statistic of NAPS and environmental cost series 84
4.4 Correlation analysis of NAPS and environmental cost series 86
4.5 Balanced panel unit root test results on NAPS and environmental
cost series 87
4.6 Co integration test results on the relationship among environmental
cost variables and net asset per share (NAPS) 89
4.7 Granger causality test on the relationship among environmental cost
variables and net asset per share (NAPS) 91
4.8 Summary of Hausman test results of the effect of environmental cost
on net assets per share (NAPS). 93
4.9 Test results of the effect of environmental costs on net asset per share 94
4.10 Descriptive statistics of environmental cost and earnings per share series 96
4.11 Correlation analysis of environmental cost and earnings per share series 98
4.12 Balanced panel unit root test results on EPS and environmental cost series 99
4.13 Co-integration test results on the relationship among earnings per share
and environmental cost series 101
4.14 Granger causality test on the relationship among environmental cost
variables and earnings per share (EPS) 102
4.15 Summary of Hausman test results of the effect of environmental
costs on earnings per share (EPS) 105
4.16 Test results of the effect of environmental costs on earnings per share 106
4.17 Descriptive statistic of environmental costs and price earnings ratio (PER) 108.
4.18 Correlation analysis of environmental costs and price earnings ratio 110
4.19 Balanced panel unit root test results on price earnings ratio and
environmental cost series 111
4.20 Co-integration test results on relationship among environmental cost variables and price earnings ratio 112
4. 21 Granger causality test on the relationship among environmental cost variables and price earnings ratio (PER) 114
4.22 Summary of Hausman test results of the effect of environmental costs
on price earnings ratio 116
4.23 Test results of the effect of environmental costs on price earnings ratio 117
4.24 Descriptive statistics of financial performance series 119
4.25 Descriptive statistic of environmental cost and net profit margin series 121
4.26 Correlation analysis of environmental cost and net profit margin series 123
4.27 Balanced panel unit root test results on net profit margin and
environmental cost series 124
4.28 Co-integration test results on the relationship among net profit margin
and environmental cost series 125
4.29 Granger causality test on the relationship among environmental
cost variables and net profit margin 127
4.30 Summary of Hausman test results of the effects of environmental
cost on net profit margin 129
4.31 Test results of the effects of environmental costs on net profit
margin 130
4.32 Descriptive statistic of returns on equity (ROE) and environmental
cost series. 132
4.33 Correlation analysis of returns on equity (ROE) and environmental cost series 134
4.34: Balanced panel unit root test results on return on equity and
environmental cost series 135
4.35 Co-integration test results on the relationship among return
on equity and environmental cost series 136
4.36: Granger causality test on the relationship among environmental cost
variables and returns on equity (ROE) 137
4.37 Summary of Hausman test results of the effect of environmental
costs on returns on equity 140
4.38 Test results of the effect of environmental costs on returns on
equity (ROE) 142
4.39 Descriptive statistic of returns on assets (ROA) and environmental
cost series. 142
4. 40 Correlation analysis of returns on assets and environmental cost
series 143
4.41 Balanced panel unit root test results on return on assets and
environmental cost series 144
4.42 Co-integration test results on the relationship among returns on Assets
and environmental cost series 145
4.43 Granger causality test on the relationship among environmental cost
variables and returns on assets (ROA) 147
4.44 summary of Hausman test results of the effects of environmental
costs on returns on assets 149
4.45 Test results of the effects of environmental costs on returns on assets 150
LIST OF FIGURE
2.1 Framework of stakeholders 28
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The issue of global warming and climate change as a result of migration of people from rural to urban cities has no doubt made corporate firms to take environmental policies serious The urban –rural migration of man as a social being has brought about both negative and positive impact on our environment because of concentration of industries and people in those cities (Duke and Kamkpang, 2013) . Such negative effect on our environment include deforestation, desertification and emission of waste matters. This results to pollution of our land, sea, water etc Corporate organizations are now faced with challenges in managing externalities and social conflicts like environmental pollution above security issues, non employment of local communities where the firms are situated and illegal land use. All the above conflicts are closely associated with stakeholders interests. The stakeholders include share shareholders, employees, investors government, local communities, consumers and non – governmental agencies who are now conscious about the extent firms respond to their corporate social responsibility. (Freeman 1995; and Fontaine, Harman and Schmid, 2006). The issue of government regulations, pressure groups and green consumer pressure has no doubts reawakening corporate attention to strategic and competitive role of environmental responsibility to corporate survival. Although this development is seen more in developed countries than in developing countries because of weak government regulations, lack of organized pressure groups and consumer awareness to influence corporate behaviour in developing nations. This corroborates with Oti, Effiong and Tieseh (2012) who observed that governmental regulations, pressure group activity and consumer awareness is weak in developing countries. On the other hand, the positive impact on our environment as a result of concentration of industries according to Duke and Kamkpang (2013) include production, distribution and consumption of goods and services and management of waste products.
However, with globalization and harmonization of accounting standards in recent times Corporate bodies are now conscious of their international market and making appreciable efforts as regards sustainable business practices. In Nigeria precisely, results of sampled industries showed that a few companies are becoming aware of environmental projects. Bassey, Effiong and Eton (2013). However, some companies are not taking the environmental and social activities very serious not knowing that environmental reporting activity is capable of enhancing corporate reputation and consequently guaranteeing competitive advantage. In support of the above, Nabanee and Ellili (2016) posit that it is through environmental reports, firms disclose voluntary information on their environmental, economic and social impacts produced by their actions. They further noted that by so doing, it makes firms to reduce information failure and same time enhance transparency on its positive or negative environmental performance. Porter and Van der Linde (1995) were of the view that if firms properly designed environmental policies it can go a long way in leading such firms to experience innovations partly or fully off-set the cost of compliance. They further posit that innovation off-set arises in reduction of pollution as a result of improved efficiency of resource usage by the firms. This is often referred to as win-win opportunities Porter’s business strategy. They argued that pollution caused by firms actions is a mark poor management and inefficient use of resources and backwardness in business.
In view of the forgoing analysis, this study is aimed at testing the effect of environmental cost on firm value and financial performance of listed firms in Nigeria. The proxies for both independent and dependent variables have been chosen to s take care of the stakeholders. Thus, proxies to independent variables include Community Development Cost (CDC), Research and Development Cost (RDC) and Employee Health and Safety Cost (EHSC) Oti, Effiong and Tieseh, 2012, Beld 2014,Bassey, Effiong and Eton 2013) . On the other hand, dependent variable proxies include Net Asset Per Share (NAPS), Earnings Per Share (EPS) and Price Earnings Ratio (PER) for firm value , Net Profit Margin (NPM), Return on Equity (ROE) and Return on Asset ( ROA) for firm financial performance (Beld 2014, Aondoakaa 2015, Nnamani Onyekwelu and Ugwu 2017 Pandey and Kumar 2016, Ifurueze, Etale and Bingilar 2013)
The study adopted three sustainable indicators as measures of environmental costs namely Employees Healthy and Safety Costs, (EHSC), Research and Development costs (RDC) and Community Development (CDC) which are identifiable within the companies that showed reports of environmental reports against Net Asset per share( NAPS),, Earnings Per Share (EPS) and Price Earnings Ratio (PER) which serve as firm value and financial performance.
The above variables are chosen because they are readily available and prior researchers like Ifurueze Etale and Bingilar 2013, Deak 2013,Biobele 2014, Omodero and Ihendinihu 2016 and Angelia and Furyanyihsih 2015 have adopted them as proxies for firm value and financial performance. The research is an extension of Ifurueze, Etale and Bingilar (2013) with Net Asset Per Share (PER)) and Research and Development Cost (RDC) as new areas. The research will contribute to the existing literature by examining this issue within the context of listed firms across all the eleven sectors of the capital market to ascertain how environmental costs affect firm value and financial performance.
In the light of above issues, the study examines the effect of environmental costs on firm value and financial performance on listed firms in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Sustainability in business requires firms not to measure only profit, but should consider planet and people by producing accurate information on both environmental costs and Revenue. Environmental costs account to one of the many different types of costs firms incur as they provide goods and services to their customers (Deegan, 2002), According to Freeman (1995), environmental performance is one of the many important measures of business success.
Regrettably, there are conflicting findings on the relationship between Environmental costs and firm performance. This is because results of most researchers conducted in this area of study are mixed. This is evidenced by three different schools of thought.
The first researchers on this issue (Neo classical school of thought), argue that environmental regulations may impose additional costs to firms (Walley and Whitehead 1994, Palmer, Oates and Portey, 1995, Jones and Rubin 2001, Klassen and Mclaughlin, 1996).
Second school of thought (positive), argue that there is a positive relationship between environmental costs and firm value / financial performance (Spicer, 1998 and Konar and Cohen 2001).
The last group of researchers is the mixed result school of thought. Their results showed an inverse ‘U’ shape relationship that exists between environmental costs firm value and financial performance. This shows that in the short run, negative relationship exists while in the long run positive relationship exists. (Codeiro and Sakis 1997; and Wagner 2001) The question is, since environmental regulation may impose additional costs as reported by the neo classical school of thought, should firms ignore environmental and social activities? What will be the economic effects if firms ignore? For instance, if firms ignore engaging themselves in environmental and social activities, there is the tendency that they will experience low patronage from customers (public). There is also the tendency of experiencing crisis in the host communities and this may lead to stoppage in production of goods and services, thus, affecting the firms value and financial performance. Such firms may not compete favorably at the global market. It is imperative for firms to engage in environmental and social activities because of its long term benefits, and the need to accommodate different stakeholders in order to ensure sustainability in business. Pinpointing the implication pursuing profit maximization objective by firms, Dimowo (2010) makes it clear that firms pursing profit objective are likely to do serious social harm while the environment suffers . They further suggest that there should be a meeting point between firms objective of profit maximization and the need for environmental management. This has made environmental costs to become the concern and focus of countries and responsible corporate management (Okoye and Ngwakwe ,2004 as cited in Nwaiwu and Oluka ,2018).
There is also absence of studies on the effect of Environmental cost on the CSR projects that listed firms in Nigeria can execute and how those projects impact on their value and financial performance.
. The study investigated the extent to which environmental costs (employee health and safety costs, community development costs, and research and development costs) affect firm value (earnings per share, net asset per share and price earnings ratio) and financial performance (net profit margin, return on assets, return on equity).
In view of the above problem, it is the researcher’s opinion to investigate the effect of environmental cost (RDC, CDC, EHSC) on firm value and financial performance of companies listed on the Nigerian Stock Exchange.
1.3 OBJECTIVES OF THE SEUDY.
The main objective of this research is to examine the effect of Environmental costs on firm value and financial performance: A cross sectional approach of listed firms in Nigeria.
Specifically, the study is driven by the objective to:
i. Assess the effect of Environmental costs on Net Asset Per Share of listed firms in Nigeria.
ii. Ascertain the extent to which Environmental costs impact on Earnings Per Share of listed firms in Nigeria
iii. Determine the impact of Environmental costs on Price Earning Ratio of listed firms in Nigeria
iv. Assess the extent to which environmental costs affect Net Profit Margin of listed firms in Nigeria.
v. Ascertain the effect of environmental costs on Return on Equity of listed firms in Nigeria.
vi. Determine the effect of Environmental costs on Return on Asset of listed firms in Nigeria.
1.4 RESEARCH QUESTIONS
The following research questions guide this research:
i How does Environmental cost influence Net asset Per share of listed firms in Nigeria?
ii To what extent does Environmental costs impact on Earnings Per Share of listed firms in Nigeria?
iii How does Environmental costs impact on Price Earning Ratio of listed firms in Nigeria?
iv How does Environmental costs affect Net Profit Margin of listed firms in Nigeria?
v What is the effect of Environmental costs on Return on Equity of listed firms in Nigeria?
vi What is the effect of Environmental costs on Return on Assets of listed firms in Nigeria?
1.5 RESEARCH HYPOTHESES
In order to realize the objectives of this study, the following hypotheses were tested:
H01 : The effect of Environmental costs on Net Assets Per Share of listed firms in Nigeria is not significant.
H02: Environmental costs do not have any significant impact on Earnings Per Share of listed firms in Nigeria.
H03: The impact of Environmental costs on Price Earnings Ratio of listed firms in Nigeria is not significant.
H04: Environmental costs do not significantly affect Net Profit Margin of listed firms in Nigeria.
H05: Environmental costs do not have any significant effect on Return on Equity of listed firms in Nigeria.
H06: The effect of Environmental costs on Return on Assets of listed firms in Nigeria is not significant.
1.6 SIGNIFICANCE OF THE STUDY
The research would be useful to the following stakeholders:
Firms: It will provide empirical evidence on the need for Nigerian firms to focus on environmental preservation and sustainability development. It will also help firms that are yet to adopt Environmental reporting practices to understand the effects on corporate value and financial performance. It will equally assist firms in determining which Environmental standard to follow (see appendix
Government regulatory bodies: For the fact Financial Reporting Council of Nigeria (FRCN) has no standard in respect of publishing separate Environmental reports. This study will encourage regulatory bodies to ensure compliance to the existing performance indicators.
Local Communities and Other Stakeholders: The research will aid to educate the local communities and other stakeholders such as employees, non- government organization on the expectations of the firms in their areas and for accountability sake.
Researchers/ Educational Institutions: It will contribute to the enrichment of the literature on Environmental report. It will equally throw more light to students, Scholars and Academics on the need for collaboration between firms and higher institutions on research and development and staff training .
Finally, it will serve as a body of reserved knowledge to be referred to by our teeming researchers.
1.7 SCOPE OF THE STUDY
The research covered a period of (7) years (2012 -2018) . The choice of this period is in line with period of adoption of International Financial Reporting Standard (IFRS) in Nigeria. The period is chosen because it ensures uniformity of standards in the annual reports and accounts collected from listed firms. The study centers on eleven sectors in the capital market of the Stock Exchange of Nigeria (see appendix21 ) . .
The following variables are used for environmental costs; CDC, EHSC and RDC, while on other the hand, firm financial performance is represented by NPM, ROA ROE. The firm value is represented by EPS, PER and NAPS.
1.8 LIMITATION OF THE STUDY
The researcher encountered the problem of sourcing for data. This is because the extent of prior research available on environmental performance by listed firms in Nigeria is limited. In spite of the dearth of data, the researcher was able to collect enough data through friends, internet and staff of the Nigerian stock exchange and was able to address the research questions.
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