Abstract
Many business managers start to adopt environmental–friendly activities due to pressures and concerns regarding the potential negative environmental impacts from their regular activities. However, there is no consensus regarding whether better environmental performance can lead to superior financial performance. Academic research also shows mixed or even contradictory results, possibly due to various limitations and problems. This study builds a multilevel framework to study the complicated relationship between environmental performance and financial return and reconcile those non–consensus results in many previous studies. An overall positive relationship is found between environmental and financial performance with variances across companies and industries due to company– and industry–level heterogeneities. Negative relationship is also identified for some firms in certain industries. Moreover, the bi–directional causal relationship between environmental and financial performance also imply that it is necessary for companies to have sufficient financial resources in order to implement proactive environmental strategies and initiatives. The findings in this study make contributions to the literature, provide guidelines for managers and investors, and give implications for policy makers.