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Prof. Noushi Rahman, Pace U. Lubin School of Business

Prof. Noushi Rahman, Pace U. Lubin School of Business

A popular focus of scholars studying corporate behavior and the environment has been a simple question: “Does it pay to be green?

But this arena is full of charges of “greenwash” and dogged by inconsistent ways of measuring success (both environmental and financial), meaning that clarity can only emerge through careful meta-analysis — a research method in which peer-reviewed studies are carefully sifted and cross-checked to derive broader insights.

That’s where scholars such as Dr. Noushi Rahman, a professor of management at the Pace University Lubin School of Business, come in. As one of this year’s Pace Academy Faculty Scholars, Rahman has turned his skills at assessing corporate performance to this question. Read on for the first of two posts in which he explains his project (the second one is here):

Multiple meta-analytic studies conclude that corporate environmental performance (CEP) does have a modest but significant positive association with corporate financial performance (CFP) (Horvathova, 2010; Margolis et al., 2007; Orlitzky et al., 2003).

But that’s just step one. With general consensus about the positive relationship between CEP and CFP established, it is important for researchers to dig deeper, clarifying when and how this effect occurs.

Dixon-Fowler et al (2013) note the limited nature of past meta-analysis on the CEP-CFP linkage and go beyond this traditional research question by asking “when does CEP have a positive influence on CFP?”  They answer the question by adopting a finer grained coding mechanism for individual empirical studies—this approach allowed them to specify a series of contrasting situations in which the positive relationship between CEP and CFP became more or less salient.  Notwithstanding this excellent effort, we still do not know why CEP has a positive influence on CFP.  The most fundamental theory-advancing questions normally start with “why” (Sutton and Staw, 1995) and it is ironic that after six meta-analyses on the topic, we do not have a rigorous answer to this critical question.

To answer why CEP is positively associated with CFP, I follow the meta-analytic approach of Dixon-Fowler et al (2013), trying to code each individual empirical study on the CEP-CFP relationship in an exceptionally detailed manner.  However, whereas Dixon-Fowler et al include all conditions that they could identify to respond to numerous “when” contingencies affecting the CEP-CFP relationship, I select possible moderators based on extant theories that can potentially explain the CEP-CFP positive relationship in order to respond to why a positive CEP-CFP relationship exists.

The strongest justifications in favor of investing on environmental initiatives come from signaling theory and institutional theory.  According to signaling theory, while strong CEP has associated signal costs in the form of investments toward environmental initiatives, weak CEP has associated signal costs in the form of penalties from illegitimacy and long-term poor performance (Connelly et al., 2011, p. 58).  Therefore, there is an inherent need for firms to signal their positive CEPs.  Signals of positive CEPs are received and interpreted by key stakeholders (e.g., buyers, suppliers, etc.) that, in turn, can have a positive impact on CFP.  According to institutional theory, isomorphic pressures force firms to behave in certain ways in order to maintain survive and thrive in the industry space (DiMaggio & Powell, 1983).  Scholars have applied the concept of isomorphic pressures to explain for-profit firms’ choices to invest in environmental initiatives (Delmas & Toffel, 2004).  Firms engaging in environmental initiatives may yield better CFP by virtue of greater legitimacy, better impression management, and overcoming unsystematic risks (Bansal & Clelland, 2004).

Therefore, in designing this meta-analysis, the moderators reflecting signaling and institutional forces are considered distinct from all other contingencies.  By conducting a first step meta-analysis using the other contingencies, and then conducting a second step meta-analysis by using both other contingencies as well as theory-linked contingencies, it would be possible to test whether signaling and institutional theoretic contingencies indeed moderate the CEP-CFP relationship over and above the methodological and other contextual artifacts.


Bansal, P., & Clelland, I. (2004). Talking trash: Legitimacy, impression management, and unsystematic risk in the context of the natural environment. Academy of Management Journal, 47(1), 93-103.

Delmas, M., & Toffel, M. W. (2004). Stakeholders and environmental management practices: an institutional framework. Business strategy and the Environment, 13(4), 209-222.

DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147-160.

Dixon-Fowler, H. R., Slater, D. J., Johnson, J. L., Ellstrand, A. E., & Romi, A. M. (2013). Beyond “Does it Pay to be Green?” A Meta-Analysis of Moderators of the CEP–CFP Relationship. Journal of Business Ethics, 1-14.

Horváthová, E. (2010). Does environmental performance affect financial performance? A meta-analysis. Ecological Economics, 70(1), 52-59.

Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2007). Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance. Ann Arbor, 1001, 48109-1234.

Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3), 403-441.

Sutton, R. I., & Staw, B. M. (1995). What theory is not? Administrative Science Quarterly, 40(3), 371-384.