ENVIRONMENTAL COSTS AND FINANCIAL PERFORMANCE OF SELECTED LISTED FIRMS IN NIGERIA: THE SHORT- AND LONG-RUN EFFECTS

Abstract

Background: Environmental expenditures generate divergent financial outcomes in Nigerian listed firms based on strategic orientation. Aims: This study examines how internal and external environmental costs differentially affect operating cash flow margin and market-to-book value ratio.  Methods: The Pooled Mean Group (PMG) ARDL/ECM estimator was applied to examine the short- and long-run effects. Sample: The study used 150 firm-year observations from ten Nigerian manufacturing firms (2010-2024). Results: The PMG long-run estimates show a clear asymmetry: internal environmental costs are positively and significantly associated with operating cash flow margin (β = 4.85, p < 0.001) and market-to-book value ratio (β = 16.48, p < 0.001), while external environmental costs show significant negative associations with both (β = -6.31 and -20.34, respectively, p < 0.001). Short-run effects show immediate market reactions to environmental incidents, whereas preventive investments yield gradual returns. Error correction terms (-0.39 to -0.42) indicate 39-42% annual adjustment toward equilibrium, highlighting that avoiding failures delivers greater financial value than incremental prevention. Conclusions: Findings establish that the cost allocation strategy, not aggregate spending, determines performance, positioning proactive environmental management as value creation rather than regulatory compliance. Implications: The study provides empirical grounding for Nigeria's sustainability disclosure framework by demonstrating that capital markets reward prevention and penalize remediation.