Environmental management practices and financial performance using data envelopment analysis in Japan: The mediating role of environmental performance

Abstract This study investigates the relationship between environmental management practices (EMPs) and financial performance (FP) and consequently ascertains whether environmental performance (EP) can mediate the EMPs–FP nexus. Distinctly using data envelopment analysis and generalised method of moments techniques to analyse a comprehensive dataset of Nikkei 225 listed firms from 2007 to 2018 (1920 firm‐year observations), our findings first suggest that EMPs have a positive effect on FP. Second, the desired EP can be achieved through the adoption of comprehensive EMPs. Third, improved EP has a substantial impact on shaping the EMPs' effect on FP. These findings are consistent with the predictions of resource‐based view and institutional theories. The results are robust to controlling for different types of alternative measures and endogeneities. The findings have important implications for academics, investors, managers, policymakers and regulators.