Institutional quality as a moderator of the relationship between circular economy transition and financial performance in Sub-Saharan Africa

This study examines the relationship between circular economy transition and financial performance in Sub-Saharan Africa (SSA), with particular emphasis on the moderating role of institutional quality. The Circular economy (CE) transition is receiving more attention as a route to sustainable development, but there is little empirical evidence on the association of financial performance with the CE transition at the national level, particularly in developing regions that vary widely across countries in terms of institutional conditions. Based on a unbalanced panel dataset of 40 SSA countries from 2012 to 2021, this study examines how institutional quality moderates the relationship between the development of the circular economy and financial performance. Circular economy development is proxied by adjusted net savings (ANS), which serves as an indirect macro-level proxy for circular economy transition and broader sustainable resource management. Financial performance is measured using aggregate banking-sector Return on Assets (ROA) and Return on Equity (ROE). The empirical analysis applies complementary panel-data estimators, including Random Effects (RE), Dynamic Panel Generalized Method of Moments (GMM), Method of Moments Quantile Regression (MMQR), and Instrumental Variable GMM (IV-GMM), to examine average relationships, address potential endogeneity concerns, and capture heterogeneous effects across different levels of financial performance. The results consistently show that ANS-based proxy for circular economy transition, when considered independently, is not significantly associated with improved financial performance. In the baseline estimations there is in general a negative or non-significantt association between the ANS-based proxy for circular economy transition and ROA and ROE, which may be consistent with short-term adjustment costs associated with the broader transition, although the estimated associations do not directly establish this mechanism. Institutional quality, however, a positive association with financial performance and has an important conditioning role. The overall association between the development of the circular economy and institutional quality is positive and statistically significant, especially for ROE, which means that higher institutional quality facilitates countries to capitalize on the benefits of a circular economy’s transition. The MMQR findings also show that the relationships between these are different in the different levels of financial performance, with institutional quality being more important in the more successful economies. Overall, the findings indicate that advancing ANS-based proxy for circular economy transition in SSA requires more than promoting circular practices alone. To ensure that the transition towards a circular economy can help improve in financial outcomes, the quality of the regulatory framework, the effectiveness of governance and the capacity of institutions are essential.