Relationship Between Environmental Cost Disclosure and Financial Performance of Manufacturing and Construction Firms Listed in Nairobi Securities Exchange; The Moderating Effect of Firm Size

Abstract

Environmental issues have become increasingly prominent, driving the need for companies to operate transparently and responsibly. This study investigated the moderating effect of firm size on the relationship between environmental cost disclosures and financial performance among manufacturing and construction firms listed on the Nairobi Securities Exchange in Kenya. The study was guided by the stakeholder’s theory. Using a combination of explanatory and longitudinal research designs, the study analyzed data from audited annual reports of manufacturing and construction firms from 2014 to 2021. Data was coded into STATA version 17 and analyzed using both descriptive and inferential statistics. Results indicated that financial performance positively and significantly correlated with environmental costs (r=0.460, p < 0.01), firm size (r=0.416, p < 0.01). Also, environmental costs disclosure positively and significantly correlated with firm size (r=0.213, p < 0.05). The study further established that environmental cost disclosure (β =0.1273701, ρ-value <0.05) had a positive and significant effect on the financial performance of manufacturing and construction companies listed in Nairobi securities exchange. Further, the study found that firm size moderated the relationship between environmental cost disclosure (β= 0.0041, ρ<0.05) and financial performance of manufacturing and construction companies listed in Nairobi securities exchange. This result suggests that the impact of environmental cost disclosure on financial performance is indeed influenced by firm size. Managers should prioritize the transparent reporting of environmental costs, as these disclosures have been shown to positively impact financial outcomes. Hence, firms can demonstrate their commitment to sustainability and responsible business practices, which in turn can attract investors and stakeholder trust.