Does the importance of environmental issues within an industry affect the relationship between lean operations and corporate financial performance?

Abstract

Lean operations and environmental sustainability have been generally accepted to be complementary activities, although prior studies have not found consistent relationships between these factors and corporate financial performance. It has been proposed that these inconsistent findings might be due to industry-specific differences in sustainability. Thus, this study examines: (i) whether the level of leanness in companies is related to the importance of environmental sustainability and (ii) if the relationship between companies’ leanness and their financial performance is heightened by the importance of environmental issues inherent in their industries. To measure the importance of environmental issues in an industry, we employ the Sustainability Accounting Standards Board (SASB) industry Environment Materiality Map. We use panel regression to analyze a sample containing 30,433 company-year observations from 2,223 companies in 77 unique industries, operating over the period from 2000 to 2019, and examine the relationships between company leanness (inventory leanness, capacity leanness, and property, plant, and equipment newness), environmental materiality, and financial performance. We find that three widely used operational levers (inventory leanness, capacity leanness, and newness) all relate to better financial performance. The study also determined that the level of environmental materiality in an industry significantly is related to two of these levers (capacity leanness and newness.) Additionally, for these two levers, their positive relationship with financial performance is heightened in industries with higher levels of environmental materiality