Corporate Governance and Environmental Performance: Does Contingency Theory Affect the Explanatory Power of Theoretical Frameworks?

There is extensive literature on the relationship between corporate governance (CG) and firms' environmental performance (EP). However, the empirical findings remain somewhat equivocal. A variety of theoretical approaches have been utilised to provide a suitable basis for explaining the causal relationship, including legitimacy theory, stakeholder theory, agency theory and the resource‐based view. We argue that the explanatory power of each theory is contingent upon firm‐specific characteristics and that these characteristics moderate the relationship between CG and EP. Consequently, contingent factors must be taken into consideration when constructing a valid theoretical model. Drawing upon the extant literature, we have developed a measure of firm‐specific adequacy for the four theories. Using a sample of 2642 publicly traded nonfinancial US firms, we determine the applicability of these theories based on 17,096 firm‐year observations. Our results support the view that the contingent adequacy of theories moderates the relationship between CG and EP. We therefore call for revised empirical research that endogenises firm‐specific contingency measures.