Paying or Being Paid to Be Green?

This paper proposes a system of simultaneous equations in a panel data setting to examine the relationship between corporate financial performance (FP) and corporate environmental performance (EP) for the group of firms comprising the S&P 500 in- dex. The study separates between brown (heavily polluted) and green (less polluting) sectors. Two main findings emerge from this empirical analysis. First, the impact of environmental performance on financial performance is negative for brown firms and positive for green firms. In contrast, the impact of financial performance on environ- mental performance is positive for brown firms and negative for green firms. Green firms seem to be the winners in this relationship increasing financial performance by reducing investment to be green. Brown firms, on the other hand, need to invest on environmental performance at the expense of financial performance. These results are robust to the presence of sector- and firm-specific fixed effects and alternative estimation methods