LAUSR

Abstract The relationship between the environmental and financial performance has received significant attention in recent decades; however, in general the findings remain inconclusive and inconsistent. Given the debate on the nature of the relationship, this study estimates the bi-directional causation between environmental and financial performance of the Australian mining industry. Considering several environmental initiatives by the mining companies and financial incentive from the Australian Government, the findings of the study will enable the mining companies and the Government to evaluate the efficacy of their environmental operations. The study applies the Granger causality test to measure the bi-directional causality and the VAR model to estimates the size of effect. Furthermore, this study applies the instrumental variable technique to address endogeneity issue in the econometric model. The causality test reveals that bi-directional causality holds between environmental and financial performance. After addressing endogeneity, the study also contends that improved environmental performance leads to better financial performance. The findings further suggest that the marginal cost of environmental initiatives is higher for more productive firms, and this leads to downwards bias in the panel least square estimation. We conclude that the financial stability of the mining companies is necessary to achieve a more significant amount of emissions reduction.