Corporate governance as a moderator of the relationship between environmental regulations and financial performance: evidence from European high-polluting firms

Purpose This study aims to examine the impact of environmental regulations on financial performance, emphasizing the moderating role of corporate governance. It distinguishes between mandatory and voluntary regulations and their financial effects on high-polluting firms across ten EU countries. Design/methodology/approach Using panel data from 80 heavy-polluting companies (2010–2022, 805 observations), this research uses a random effects model with time-lagged analyses to address dynamic relationships while mitigating endogeneity concerns. A corporate governance index, created via multiple correspondence analysis, integrates board independence, gender diversity, sustainability audits and environmental partnerships. Robustness tests are conducted by replacing return on assets with return on invested capital and market-to-book ratios. Findings The results indicate that voluntary environmental regulations enhance profitability over time, while mandatory regulations initially hinder performance due to compliance costs but yield positive long-term effects. Corporate governance mitigates the short-term negative impact of mandatory regulations but does not amplify the benefits of voluntary ones. Practical implications This study offers valuable insights into how environmental regulations and corporate governance influence financial performance. It suggests that improving environmental standards can enhance reputation, navigate regulations and boost value. Policymakers should balance compliance demands with incentives, while firms must strengthen governance to manage regulatory challenges, mitigate financial pressures and ensure resilience. Originality/value This study provides originality by examining both mandatory and voluntary regulations and their distinct effects on financial performance, addressing a research gap in high-polluting European industries. It also contributes by constructing a composite corporate governance index to address these dynamics.