Relationships between eco-innovation and financial performance – evidence from publicly traded companies in Poland and Hungary

• In this study we provide insights on eco-innovations and financial performance.
• We analysed data of companies listed on the Stock Exchanges in Warsaw and Budapest.
• From total population of 439 firms, 89 companies were identified as eco-innovators.
• Eco-innovators have higher returns on assets and equity, and lower earnings retention.
• Eco-innovators are larger and possess greater free cash flows than other firms.

While the analysis of the linkages between eco-innovative activities and financial performance is a popular topic in the existing body of literature, many questions about these relationships, especially in transition economies in Central and Eastern Europe (CEE), remain unanswered. In this paper, we explore four types of eco-innovation (product, process, market and sources of supply) and their impact on accounting-based measurers of financial performance using the data on Polish and Hungarian publicly traded companies from the years 2006–2013. Our results indicated that eco-innovators were generally characterized by higher returns on assets and equity and lower earnings retention. Additionally, companies that introduce eco-innovation were also significantly larger, more likely to face lower financial risk exposure and more likely to possess greater free cash flow than conventional firms. The findings suggest that strong asset and financial capabilities are relevant pre-conditions for the development of eco-innovativeness and that there is a need for environmental policy to create clear incentives for SMEs to increase activities in that area. Overall, this study extends the understanding of financial performance implications of innovation by focussing on the area of environmental innovation.