Green Accounting and Corporate Financial Performance: The Theoretical and Dynamic Empirical Analysis

Abstract

This paper presents a critical re-evaluation of the connection between the green accounting practices (GAP) and the financial performance of corporates regarding the theoretical disintegration and lack of methodological consistency that has produced conflicting evidence in previous studies. The study, based on a theoretically coherent system of combining the Stakeholder Theory and the Natural Resource-Based View (NRBV), is that there are two functions of environmental accounting in shaping the financial performance, one being legitimate management and the other one strategic capability creation. The analysis is conducted using a longitudinal panel data structure that applies a quality-weighted index of disclosure to measure GAP to a sample of firms in industry sectors with a high sensitivity to the environment. The unobserved heterogeneity, endogeneity, and temporal aspects of effects are controlled by using the dynamic panel estimation methods such as system GMM. The findings provide strong empirical support that green accounting practices have a positive and statistically significant effect on the profitability of the firm and market value. More importantly, the analysis shows that the economic gains of GAP are not short-term but rather long-term and lagged effects are statistically and economically significant. This interpretation brings out the conceptualization of environmental accounting as a long-term strategic investment and not a short-term cost burden. The research holds substantive implications to the literature of sustainability accounting. Theoretically speaking, it promotes a combined stakeholder-NRBV model, and it shows the paramount importance of dynamic, longitudinal analysis. In practice, it gives strong incentives to managers to make green accounting an integrated strategic management system and policymakers to work out standardized reporting and assurance systems that give greater incentives to substantive accountability towards the environment. This study confirms that advanced environmental accounting is instrumental in streamlining the alignment between financial resilience in companies and environmental sustainability by explaining how and when the GAP-performance relationship would be active.

Introduction

This study examines the relationship between green accounting practices (GAP) and corporate financial performance, addressing theoretical, methodological, and empirical gaps in prior research. As environmental degradation and climate instability intensify, companies face growing pressure to integrate environmental responsibility into financial decision-making. Green accounting extends traditional accounting by identifying, measuring, and reporting environmental costs and benefits to support sustainable development.

Literature Context and Research Gaps

Existing research presents inconclusive findings regarding the financial impact of green accounting.

• Supporters argue that environmental accounting improves transparency, stakeholder trust, operational efficiency, and long-term financial performance.

• Skeptics contend that environmental expenditures impose short-term costs that may reduce profitability.

The inconsistencies stem from several limitations:

1. Overreliance on short-term accounting indicators (e.g., ROA).

2. Measurement weaknesses, particularly disclosure-based indices that may capture symbolic reporting rather than substantive environmental action.

3. Limited attention to mediating mechanisms (e.g., innovation, efficiency gains) and contextual moderators (e.g., regulation, governance).

4. Theoretical fragmentation between stakeholder theory (legitimacy focus) and the Natural Resource-Based View (NRBV), which emphasizes environmental capabilities as competitive advantage.

The study seeks to overcome these weaknesses by integrating stakeholder theory and NRBV into a unified framework and employing more rigorous measurement and econometric methods.

Methodology

The research adopts a quantitative longitudinal panel design, focusing on publicly traded firms in environmentally sensitive industries (e.g., energy, mining, chemicals, heavy manufacturing).

Key elements:

• Green Accounting Practices (GAP): Measured using a refined, weighted disclosure index based on GRI and IFAC standards, capturing depth and quality of environmental cost reporting.

• Financial Performance: Measured using accounting-based indicators (ROA, ROE) and market-based Tobin’s Q.

• Controls: Firm size, leverage, growth opportunities, capital intensity, and year/industry effects.

• Estimation Techniques: Fixed-effects and random-effects panel models, Hausman tests, and dynamic system GMM to address endogeneity and reverse causality.

Robustness checks include alternative GAP measures, sub-sample analyses by regulatory intensity, and instrumental variable approaches.

Key Findings

1. Positive and Significant Relationship:
   Green accounting practices are positively associated with financial performance (ROA and ROE).

2. Dynamic Effects:
   Lagged GAP has a stronger positive impact, indicating that financial benefits accumulate over time rather than appearing immediately.

3. Endogeneity Mitigated:
   System GMM and instrumental variable tests confirm that improved financial performance results from stronger green accounting practices—not vice versa.

4. Robustness:
   Results remain consistent across alternative measures, subsamples, and market-based indicators (Tobin’s Q).

Conclusion

This study proceeded to critically re-examine the nexus between the green accounting practices (GAP) and the corporate financial performance in order to address the interminable theoretical ambiguities and methodological inconsistencies that have always marked the field of inquiry. Using a longitudinal panel data structure and a combined theoretical framework, the results of the analysis are very strong, unambiguous evidence: the implementation of substantive green accounting practices has a positive and statistically significant impact on firm profitability and market value. More importantly, the econometric identification of lagged effects prove that these financial benefits are not contemporaneous but accrue over time, which confirms the conceptualization of environmental accounting as a strategy, capability-building investment with a long-term potential of value creation (Hart and Dowell, 2011). This discovery not only puts to rest the long-held belief of environmental expenditure being a compliance expense, but it also puts it squarely at the heart of strategic financial management.

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Copyright © 2026 Saalah Yakubu Saalah, Umar Jiddum Jidda, Mohammed Grema Alkali, Aliyu Hassan Muhammad, Abba Jato Ibrahim, Ishaq Iliyas Ishaq. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.