Journal of Environmental Management 353 (2024) 120230

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Journal of Environmental Management

journal homepage: www.elsevier.com/locate/jenvman

Research article

Financing sources, green investment, and environmental performance:

Cross-country evidence
Imen Bouchmel a, Zied Ftiti b, Waël Louhich c, *, Abdelwahed Omri a
a
University of Tunis, High Institute of Management, ISG-T, GEF2A Lab Tunis, Tunisia
b
EDC Paris Business School, OCRE Laboratory Paris, France
c
ESSCA School of Management Paris, France

A R T I C L E I N F O A B S T R A C T

Handling editor: Lixiao Zhang This article investigates the influence of financing sources and financial constraints on green investment, based
on a study conducted with a sample of Eastern European SMEs from 2018 to 2020. We constructed a green
Keywords: investment proxy using principal component analysis, revealing two principal pillars: pure green investment and
Green investment mixed green investment. Employing two-stage least squares regression analysis (2SLS) and instrumental probit
Financing sources
(IV Probit), our results demonstrate that internal finance positively impacts green investment. Conversely, we
Financial constraints
find that leverage and financial constraints negatively correlate with green investment and environmental per­
Environmental performance
SMEs formance. The findings of this study provide compelling evidence that SMEs operating in the Eastern European
region face significant financial constraints, impeding their ability to adopt responsible investments aimed at
reducing their considerable environmental footprints. These results hold valuable implications for both managers
and policymakers, emphasizing the importance of facilitating increased access to debt and devising green
financial incentives to promote environmentally responsible investments among Eastern European SMEs,
particularly during periods of conflicts.

1. Introduction (OECD, 2018). Accordingly, adopting green and responsible strategies in

SMEs has become the subject of multiple international bodies focusing
In these recent decades, business activities have contributed particularly on the manner of financing responsible practices (Thanki
considerably to environmental degradation in the worldwide. The eco­ et al., 2016).
nomic and financial growth sustainable was accompanied by global Embracing responsible investments necessitates effective financial
warming and pollution, accelerating climate change phenomenon. decision-making and a robust capital structure to address higher envi­
Therefore, companies are nowadays more and more engaging in ronmental costs. Access to diverse financing sources stands as a pivotal
responsible strategies in response to environmental issues through determinant for companies seeking to engage in environmentally sus­
adopting green investment. Green investment does not constitute a tainable practices. The advancement of financial development assumes a
“luxury good” but an indispensability for companies to enhance finan­ crucial role in promoting long-term environmental strategies and
cial performance and stability (Farza et al., 2021; Jiang et al., 2018) as bolstering environmental performance, particularly within companies
well as economic growth (Luo et al., 2021). In addition to ecological operating in developing countries (Yuxiang and Chen, 2011). Corre­
repercussions, these sustainable practices engagement is a source of spondingly, financial constraints present a significant barrier for enter­
value creation and competitive advantage more specifically for small prises to achieve robust environmental performance (Tian and Lin,
and medium sized companies (Gangi et al., 2020). 2019; Siegel et al., 2019). This challenge is particularly pronounced
Small and medium enterprises (SMEs) constitute a prominent actor among SMEs operating in emerging economies, who commonly
in economic, social, and sustainable development in the business world encounter multiple obstacles in securing adequate funding sources
notably in developing economies. They represent 90 % of global busi­ (Dong and Men, 2014). Pietrovito (2020) highlighted that financial
nesses engendering a significant ecological footprint. Moreover, SMEs constraints hinder companies from adhering to environmental standards
are accountable for 70 % of industrial pollution in the European region and constitute a major obstacle in obtaining international

* Corresponding author.
E-mail address: [email protected] (W. Louhich).

https://doi.org/10.1016/j.jenvman.2024.120230
Received 16 January 2023; Received in revised form 30 December 2023; Accepted 24 January 2024
Available online 5 February 2024
0301-4797/© 2024 Elsevier Ltd. All rights reserved.
I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

environmental certifications, particularly for small-sized and Nations and the European Investment Bank developed policies for
less-experienced enterprises. Consequently, access to finance represents providing financing support of responsible SMEs. In 2013, the European
a substantial constraint for SMEs seeking to conduct environmentally commission introduced and financed the “Greening economies in the
responsible business operations. Additionally, Rokhmawati (2021) European Union’s Eastern neighbourhood” program (EaP GREEN) that
emphasized that the implementation of greenhouse gas emissions miti­ involve six Eastern European countries in order to advance green
gation projects requires substantial investment outlays and necessitates economy by alleviating environmental deterioration and resources
the presence of financial incentive programs to bolster the support for exhaustion. The Eastern European countries are also engaged in “GREEN
green investment costs. Numerous studies have underscored the action task force” that aims principally to boost the inclusion of envi­
importance of efficient backing from governmental bodies and inter­ ronmental concerns into the economic strategies in these transition
national organizations through the implementation of funding strategies states.
to aid companies in this endeavor (Liargovas et al., 2017). The remainder of the paper is structured as follows. Section 2 pre­
This paper is related to the above literature and provides several sents the literature background hypotheses development. In Section 3,
contributions. First, previous studies investigated the impact of we detail the sample selection, variable measurements, and the research
financing sources on firm investment (Aivazian et al., 2005; Trinh et al., methodology. Section 4 discusses the results. Section 5 concludes and
2017; Serrasqueiro et al., 2021), human resource management practices provides managerial implications.
(Di Pietro et al., 2022) as well as innovative investments (Rossi, 2015;
Howell, 2017; Behrens and Patzelt, 2018; Cumming et al., 2020). 2. Literature review and hypotheses development
However, our paper presents the specificity to focus on the responsible
and green engagements, which is a challenge for business sustainability 2.1. The determinants of green investment
nowadays. Second, previous studies have explored the effect of envi­
ronmental performance on access to finance demonstrating that adopt­ Several studies analysed the relevant factors that motivate com­
ing responsible investments enhances firm accessibility to external panies to undertake green and sustainable practices. Through a litera­
finance through promoting the reputation and transparency of the ture review, Chitimiea et al. (2021) show that several internal and
company (Eichholtz et al., 2019; Zhang, 2021), while few analyses external drivers encourage companies to invest in green projects. In one
examined how financing sources influence responsible projects. There­ hand, a category of stakeholders such as investors, suppliers, customers,
fore, our article extended the existing literature by analysing the effect and shareholders opted more commonly for responsible firms that offer
of financing sources and financial constraints on green investment. eco-friendly products and perform green investment (Adomako et al.,
Third, when focusing on the link between finance and responsible in­ 2023; Barbarossa and De Pelsmacker, 2016; Tatoglu et al., 2020). In the
vestments, most of the studies investigated external financing mainly on other hand, environmental legislation and regulation pressure have a
capital leverage demonstrating that leverage is negatively associated significant influence on firms by motivating them to get involved in
with firm investment (Danso et al., 2019; Vo, 2019; Chang et al., 2021). green investment (Stoever and Weche, 2018; Gandullia and Piserà,
Our paper adds to the literature by examining not only the case of 2020; Andreou and Kellard, 2021; Huang and Lei, 2021; Qiu et al.,
leverage but also internal finance more specifically in the case of SMEs. 2021). Another corpus of study show that green investment depends
Our paper investigates the impact of financing sources on corporate considerably on internal factors such as investors and managers orien­
green investment. Specifically, we examine how financial constraints tations (Arena et al., 2018; Benlemlih et al., 2023; Martin and Moser,
influence green investment and environmental performance. We employ 2016; Piñeiro-Chousa et al., 2021; Wan et al., 2021), organisational
the principal component analysis (PCA) to construct a green investment culture (Al-Swidi et al., 2021) and firm returns (King and Lenox, 2001;
proxy. Then, we use two-stage least squares regression analysis (2SLS) Singal, 2014; Revelli and Viviani, 2015; Muhmad and Muhamad, 2021).
and instrumental probit (IV Probit) to overcome endogeneity and cau­ Nevertheless, the availability of financing resources that stands for one
sality biases. Thereafter, we construct robustness analysis by using the of the main determinants of green investments especially in SMEs has
propensity score matching. Our empirical results show that internal been slightly discussed in the previous literature. The aim of our study is
finance is positively and significantly associated with green investment to fill this gap. In fact, green investment differs from other types of in­
and environmental performance. Meanwhile, leverage and financial vestment, and this can broadly affect its financing process. On the one
constraints have a negative influence on green investment and inhibit side, according to signalling theory, investing in green practices allows to
companies to attain environmental performance. Our findings provide transmit good signals that improve firm reputation and enhance the firm
an overall insight of the important role played by financing sources in financial performance (Tang et al., 2018; Farza et al., 2021). This can
supporting green investments within SMEs that encounter several push managers to invest the available internal funds in green measures
financial constraints. The findings of our study are helpful for practi­ to benefit from environmental and economic advantages. On the other
tioners, as they encourage them to devote more internal resources in side, green investments are considered as innovative and expensive in­
order to finance green investments. Managers are also required to avoid vestments with low probability of success and high level of uncertainty,
relying on leverage that are highly costly for SMEs and resort to other which affect the profitability and the risk level of the firm (Holzner and
financing sources. From an institutional point of view, governments Wagner, 2022). Also, green investment is associated with a long payback
must develop more green financial tools for SMEs in the Eastern Europe period given that their capital costs are commonly substantial (Ghisetti
region, especially during periods of conflicts. In fact, the Russia-Ukraine et al., 2017). Accordingly, relying on external finance is pivotal to
war have revealed the importance of promoting green financial policies perform green investments through debt finance, equity finance and
to support environmental engagement of SMEs. government financial support. Nevertheless, firms encounter major
Our sample is composed of small and medium companies (SMEs) financial constraints from external funders to provide resources for
operating in the Eastern European. The choice is motivated by several green investments particularly for SMEs that dispose of insufficient in­
reasons. SMEs constitute a crucial component of the economic devel­ ternal funds. In fact, SMEs resort mainly to debt financing that repre­
opment and inclusive growth in the Eastern Partner region. In fact, they sents their principal external financing source especially in the
stand for 83 %–99 % of total enterprises representing 60 % of value developing countries. Indeed, providing green finance instruments such
added and 70 % of employment in the OECD countries. Accordingly, as green loans, green bonds and green stocks can be a relevant alter­
SMEs business activities are followed by considerable environmental native for SMEs to alleviate financial constraints and foster sustainable
footprints and ecological issues. Thereby, adopting green investment practices (Wang et al., 2022). In the following, we expose our hypoth­
approaches and sustainable practices represents a strategic challenge for eses regarding the impact of internal finance, leverage, and financial
firms. Numerous international bodies notably the OECD, the United constraints on green investment in the Eastern European SMEs.

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I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 1
Variables description.
Variables Measures

Green Investment
HEAT_COOL Dummy Variable = 1, if the company improves its
heating and cooling systems and 0 otherwise.
MACHIN_UPGRAD Dummy Variable = 1, if the company adopts
machinery upgrades and 0 otherwise.
WASTE_MINIMIZ Dummy Variable = 1, if the company undertakes waste
minimization, waste management and recycling and
0 otherwise.
UPGRADE_VEHIC Dummy Variable = 1, if the company modernizes its
vehicles and replaces them with environment friendly
vehicles and 0 otherwise.
IMPROV_LIGHT Dummy Variable = 1, if the company improves its
lighting systems with energy efficient ones and
0 otherwise.
Fig. 1. Sample distribution by sector. CLIMATE_ENERG Dummy Variable = 1, if the company adopts more
climate-friendly energy generation on site and
0 otherwise.
2.2. Internal financing and green investment ENERGY_MANAG Dummy Variable = 1, if the company introduces
energy management systems and 0 otherwise.
Green investment represents a strategic and long-term decision AIR_POLLUT Dummy Variable = 1, if the company implements air
pollution control measures and 0 otherwise.
making that require considerable funding. According to the slack re­
WATER_MANAG Dummy Variable = 1, if the company adopts water
sources’ theory, adopting responsible activities depends on the level of management measures and 0 otherwise.
resources availability that exceeds the firm needs. Thereby, free cash OTHPOLLUT_CON Dummy Variable = 1, if the company undertakes other
flows of the company that are not needed to remaining operations pollutants control measures and 0 otherwise.
represent a major incentive for firms to invest in green activities (Fauzi Financial variables
INTERNAL_FINANCE the ratio of total of internal funds or retained earnings
and Idris, 2009). In fact, firm cash holdings contribute substantially to to acquired fixed assets for each company.
financing long term investments (Ahrends et al., 2018). These flows LEVERAGE the ratio of total of debt to acquired fixed assets for
enable companies to rely less on external financial resources specifically each company.
during critical periods and thereby preventing them from higher FINANCIAL_CONSTRAINT Dummy Variable = 1, if access to finance represents an
obstacle to firm activities and 0 otherwise.
financial costs and rigid restrictions (Chang and Yang, 2022). The
Environmental Performance
pecking order theory (Myers and Majluf, 1984) suggests that companies ENV_PERFORMANCE Dummy Variable = 1, if the green investment measures
preferred fundamentally internal finance sources to fund firm invest­ undertaken by the firm contribute to decrease its
ment. In effect, resorting to internal funds reduces information asym­ environmental footprint and 0 otherwise.
metry notably in the case of SMEs that are less informational transparent Instrumental variables
INTERNAL_WCF The percentage of internal funds or retained earnings
comparing to large firms (Stiglitz and Weiss, 1981). According to agency funding current operations for each company.
cost theory, SMEs encounter fewer conflicts of interests since the man­ EXTERNAL_WCF The percentage of external funds including bank
agers are also the shareholders, reducing the adverse selection and finance, non-bank finance, supplier credit and
moral hazards problems. Indeed, they dispose of a certain autonomy to government grants funding current operations for each
company.
invest the internal funds in green practices considering that internal
Control variables
finance is less costly and risky for SMEs and enables them to avoid FIRM_SIZE The natural logarithm of the total workers.
collateral requirements and higher interest rates. Empirical studies GOVERNANCE_BODY Dummy Variable = 1, if the company disposes of a
proved that greater corporate cash holdings enhance valuable in­ supervisory board or a board of directors or and
vestments for firms that are financially constrained more than uncon­ 0 otherwise.
STRATEG_ENV Dummy Variable = 1, if the firm adopts strategic
strained ones, which is greatly convenient for SMEs (Denis and Sibilkov, targets of environmental management and 0 otherwise.
2010). Islam et al. (2021) demonstrated in the context of developing ENERGY_TAX Dummy Variable = 1, if the company was subject to an
economies that cash flows and slack resources have a positive and sig­ energy tax and 0 otherwise.
nificant effect on corporate responsible investments. Gill et al. (2017) R&D_EXPENDITURES The natural logarithm of the one plus a company’s
research and development expenses.
outlined that adopting responsible investment and disposing of internal
CUSTOMER_PRESSURE Dummy Variable = 1, if the customers require
financing sources enable small enterprises to have better accessibility to environmental authentication and firm conformity
bank financing. Considering the above studies, our first hypothesis is as with environmental standards and 0 otherwise.
follows. BUSINESS_STRATEGY Dummy Variable = 1, if the company elaborates a
business strategy and 0 otherwise.
H1. The higher the percentage of internal financing the higher green in­ POLITICAL_STABILITY Country score ranging from − 2.5 to 2.5 evaluating the
vestment level. company stability of each country.
REGULATORY_QUALITY Country score ranging from − 2.5 to 2.5 assessing the
government ability to stimulate private sector
2.3. The impact of the leverage level on green investment development.
GDP_GROWTH The percentage of gross domestic product growth for
every country.
According to the pecking order view, when internal financial re­
sources are depleted or insufficient given that internal finance can
restrain companies to progress (Czerwonka and Jaworski, 2021), firms well as severe collateral requirements more particularly in the case of
rely on external sources to finance their investments. Considering that SMEs. Indeed, SMEs are more likely to be denied from external funders
adopting responsible projects represents a long term and innovative due to substantial information asymmetry. In addition, the underinvest­
investment, SMEs ought commonly to acquire external debt (Beck et al., ment theory indicates that green companies with higher level of leverage
2008). Based on trade-off theory, the costs of leverage may overcome its are less likely to adopt growth investment opportunities. In effect, a high
benefits such as the tax deductibility of interests. In this regard, degree of debt leads more likely firms to encounter default risk and
debt-financing sources submit higher costs compared to internal ones as

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I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 2 2.4. Financial constraints and green investment

Principal Component Analysis of Green investment.
Component Variance Difference Proportion Cumulative Financial constraints represent one of the main obstacles that impede
the economic growth essentially in the case of SMEs (Nizaeva and
Comp1 2.595 0.027 0.260 0.260
Comp2 2.567 . 0.257 0.516 Coskun, 2019). In fact, SMEs are more susceptible to encounter financial
Number of observations 4200 constraints than large companies. Access to finance has a significant
Number of components 2 negative impact on firm growth (Fowowe, 2017). Indeed, green in­
Trace 10 vestment entails higher costs and risky returns that can reduce the
Rho 0.5165
possibility for companies to provide financial resources. In effect, Leong
Note: This table presents components with eigenvalues greater than exceed one. and Yang (2021) proved that firms that are financially constrained face
It introduces the retaining of 2 components from 10 variables (Trace) providing considerably matters in corporate responsible investments that refrain
51.65% (Rho) of the total data information. The first component preserves 26% achieving CSR performance. Besides, Yu et al. (2021) evidence that, in
of data and the second one preserves 25.7% of data.
the context of Chinese companies, the capacity to adopt green innova­
tive projects is inhibited in the enterprises confronting notable financial
constraints particularly in privately owned organizations. Moreover,
Table 3 Zhang and Jin (2021) demonstrated that financial constraints have a
Rotated component analysis factor (Orthogonal Varimax Rotation). direct inhibitor impact on investing in green innovation. Accordingly,
Variable KMO Comp1 Comp2 Unexplained we can suggest our following hypothesis.
values
H3. The higher the financial constraints, the lower the investment in green
HEAT_COOL 0.901 0.402 0.038 0.531
MACHIN_UPGRAD 0.868 0.512 − 0.075 0.420
assets.
UPGRADE_VEHIC 0.885 0.402 0.001 0.579
IMPROV_LIGHT 0.891 0.482 − 0.065 0.479 3. Data and methodology
CLIMATE_ENERG 0.906 − 0.040 0.471 0.483
ENERGY_MANAG 0.907 0.233 0.251 0.521
3.1. Data
AIR_POLLUT 0.873 − 0.053 0.527 0.363
WATER_MANAG 0.900 0.078 0.415 0.445
WASTE_MINIMIZ 0.928 0.093 0.339 0.586 To test our hypotheses, we employ cross sectional data obtained from
OTHPOLLUT_CON 0.888 − 0.043 0.495 0.431 the Business Environment and Enterprise Performance Surveys (BEEPS).
Overall Kaiser-Meyer-Olkin 0.894 These surveys are developed by the European Bank for Reconstruction
Measure (KMO)
Bartlett’s Test of Sphericity: p- 0.000
and Development (EBRD), the World Bank Group (WBG) and European
value Investment Bank (EIB). They consist of questionnaires answered by 41
economies focusing on firm green governance, innovation, and financial
Note: This table introduces the distribution of the 10 variables into two con­
activities for 2018, 2019 and 2020. Our sample includes 24 Eastern
structed components and the unexplained part of each variable generated by the
principal component analysis. Values in hold correspond to the highest pro­
European countries1 covering 10,410 SMEs. We retained only com­
portions of information retained form the variables and provided in our com­ panies whose financial data are available and answers that are assumed
ponents. The first component includes four factors that are heating and cooling to be truthful to assure sample reliability. Our final sample covers 4200
improvements (0.402), machinery and equipment upgrades (0.512), upgrades of observations. Fig. 1 presents the distribution of our sample by industry.
vehicles (0.402) and improvements of lighting systems (0.482). The second The choice to focus on the Eastern European countries is motivated by
component incorporates six items that are climate-friendly energy generation several reasons. Indeed, these post-communist countries have faced
(0.471), energy management (0.251), air pollution control (0.527), water multiple political, social, and economic transitions after the dissolution
management (0.415), waste minimization (0.512) and other pollutants control of the Soviet Union. Therefore, this region has adopted a sustainable and
(0.495). green development economy that attempt essentially to protect the
environment and effectively manage the natural resources. In effect,
financial distress which hamper the possibility of acquiring funds from Eastern European countries experience several environmental matters,
external sources to finance new investments (Gebauer et al., 2018). In which are mainly caused by business activities and more particularly by
fact, multiple empirical studies pointed that financial leverage has a SMEs that have a crucial role in their economic growth. Thereby, most of
significant negative effect on corporate investment particularly in the these transition economies are involved in the climate change Paris
light of companies with superior information asymmetry and lower Agreement as well as the agenda 2030 of sustainable development.
growth opportunities (Phan, 2018; Danso et al., 2019; Vo, 2019). Thus, adopting responsible practices represents a major priority and
Moreover, Chang et al. (2021) illustrated that the leverage book value challenge in Eastern European companies. Accordingly, these post-
influences negatively green investment considering firm age and size in communist countries adapt their financial scheme in line with envi­
the Chinese context. Furthermore, considering 26 European countries, ronmental and climate objectives. Moreover, they are assisted by the
Cariola et al. (2020) highlighted that the impact of external indebted­ Green Climate Fund (GCF) that provide the needed financial support in
ness on energy SMEs performance depends on environmental sustain­ order to invest in green responsible actions and mitigate the environ­
ability performance. They proved that this relationship is preliminary mental issues. For instance, the commercial banks in Georgia and
negative and become positive for companies that realize better envi­ Armenia afforded green credits. In addition, the national bank in
ronmental performance. Additionally, Benlemlih and Cai (2020) showed Georgia implemented a sustainable finance outline and a “sustainable
that corporate environmental performance is negatively related to finance taxonomy”.
leverage ratio enabling companies to generate less tax advantages of
debt financing. Indeed, financial constraints impede companies that
undertake responsible practices to attain sustainable development.
Zhang et al. (2021) substantiated that environmental governance acts as
a significant moderator on the relationship between external financing
sources and firm economic performance. The above literature review 1
These 24 countries are: Albania, Armenia, Belarus, Bosnia and Herzegovina,
leads to the following hypothesis. Bulgaria, Croatia, Czech-Republic, Estonia, Georgia, Greece, Hungary, Kosovo,
Latvia, Lithuania, Moldova, Montenegro, Macedonia, Poland, Republic of
H2. The higher the leverage, the lower the investment in green assets. Cyprus, Romania, Serbia, Slovak-Republic, Slovenia, Ukraine).

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I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 4
Descriptive statistics.
Variables Frequencya Mean Standard-deviation Minimum Maximum

INTERNAL_FINANCE – 0.740 0.353 0 1

LEVERAGE – 0.173 0.300 0 1
FINANCIAL_CONSTRAINT 0.335 – – 0 1
GREEN_INVESTMENT – 0.643 0.478 0 1.585
ENV_PERFORMANCE 0.672 – – 0 1
INTERNAL_WCF – 0.717 0.338 0 1
EXTERNAL_WCF – 0.254 0.318 0 1
FIRM_SIZE – 3.457 1.393 0 14.330
GOVERNANCE_BODY 0.327 – – 0 1
STRATEG_ENV 0.230 – – 0 1
ENERGY_TAX 0.245 – – 0 1
R&D_EXPENDITURES – 715.807 25,062.54 0 1,500,000
CUSTOMER_PRESSURE 0.169 – – 0 1
BUSINESS_STRATEGY 0.468 – – 0 1
POLITICAL_STABILITY – 0.208 0.712 − 1.900 1
REGULATORY_QUALITY – 0.515 0.563 − 0.700 1.600
GDP_GROWTH – 4.163 1.226 1.082 7.600

Note: Our independent variables are internal finance (INTERNAL_FINANCE), leverage (LEVERAGE) and financial constraints (FINANCIAL_CONSTRAINT). Green
investment (GREEN_INVESTMENT) and environmental performance (ENV_PERFORMANCE) represent our dependent variables. Internal working capital financing
(INTERNAL_WCF) and external working capital financing (EXTERNAL_WCF) are our instrumental variables. The control variables firm size (FIRM_SIZE), corporate
governance body (GOV_BODY), strategic environmental management (STRATEG_ENV), energy tax (ENERGY_TAX), research and development expenditures
(R&D_EXPENDITURES), customer pressure (CUSTOMER_PRESSURE), business strategy (BUSINESS_STRATEGY), political stability (POLITICAL_STABILITY), regula­
tory quality (REGULATORY_QUALITY) and GDP growth rate (GDP_GROWTH). We have 4200 observations.
a
Frequency determined for binary variables. The variables are described in Table 1.

3.2. Variables measurement (0.495). Therefore, we define this component, as “pure green invest­
ment”, which represents explicit actions that companies undertake with
3.2.1. Green investment the only main objective, is to reduce their negative environmental im­
Green, sustainable, responsible, or eco-friendly investment has been pacts. We develop the green investment proxy by elaborating the
dissimilarly studied and defined by researchers and investors in different weighted average of the two retained factors pure investment and mixed
contexts. In our research, green investment is considered as companies’ investment according to the maintained information that are respec­
investment in activities that attempt to save the environment, reduce tively 0.260 and 0.257 as mentioned in Table 2.
greenhouse gas emissions, mitigate pollution, improve energy effi­ According to Klassen and McLaughlin (1996), corporate environ­
ciency, and diminish the waste of natural resources. Therefore, green mental performance represents the effectiveness of environmental
investment represents direct actions and activities that firms undertake measures in mitigating firm repercussions on the environment. To
to boost their corporate environmental responsibility and thereby measure environmental performance, we use binary variable that takes
reduce their business environmental impact. We propose to develop an one if the green investment measures adopted by the company
appropriate green investment proxy. Firstly, we identify variables rep­ contribute to diminish its environmental negative impacts such as air
resenting measures that companies adopt to mitigate their environ­ pollution, energy consumption, climate change, waste of resources and
mental footprints. On grounds of our data, we select 10 environmental zero if these green measures do not have any influence on mitigating
dummy variables that are described in Table 1. Then, we apply the business environmental footprints.
principal component analysis (PCA) that generates a reliable measure
according to Duval (2016). This technique allows clustering and mini­ 3.2.2. Financial variables
mizing items into relevant components conserving the maximum of in­ Following the literature, we measure internal financing by using the
formation. We maintain components with Eigen values exceeding one proportion of internal funds or retained earnings employed to finance
based on Kaiser rule (Kaiser, 1960). According to Table 2, we notice that the acquisition of fixed assets (Ullah, 2019). To measure the leverage,
the PCA method generates two significant components preserving 52 % we employ a proxy which is the ratio of total of debt to acquired fixed
of total information. In Table 3, we test sample adequacy by calculating assets for each company. To measure financial constraints, we follow
the Kaiser-Meyer-Olkin (KMO) that reveals an overall good value of Mateut (2018) and Ullah (2020) by relying on the following survey
0.894. We also performed the Bartlett test of sphericity, which is sig­ question “Is access to finance an obstacle to the current operations of the
nificant at 1 % level. These tests confirm the relevance and reliability of establishment”. The answer ranges from 0 to 4: 0 for no obstacle, 1 for
our principal component analysis. minor obstacle, 2 for moderate obstacle, 3 for major obstacle and 4 for
According to PCA technique, we cluster our 10 items into two prin­ very severe obstacle. In this study, we develop a dummy variable that
cipal components based on the highest proportions as presented in equals to one if the firm is financially constrained (if the obstacle is
Table 3. The first component includes four factors that are heating and moderate, major, or very severe) and 0 if it is financially unconstrained
cooling improvements (0.402), machinery and equipment upgrades (if it faces no obstacles or minor obstacles).
(0.512), upgrades of vehicles (0.402) and improvements of lighting
systems (0.482). Thus, we consider this first component as “mixed green 3.2.3. Control variables
investment”. In fact, mixed green investment refers to measures adopted In our empirical analysis, we incorporate a set of control variables
by companies in their business processes that have also an effect on that have an impact on green investment. Firstly, we employ firm size
reducing firm’s environmental impact and improving energy efficiency considering its important effect on adopting green practices within
in addition to other business goals. The second component incorporates large, small, and medium organizations (Vijayvargy et al., 2017; Yusof
six items that are climate-friendly energy generation (0.471), energy et al., 2020). We also include corporate governance body measure that
management (0.251), air pollution control (0.527), water management represents one of the main determinants of promoting green investment
(0.415), waste minimization (0.512) and other pollutants control approaches (Cosma et al., 2021). Also, we integrate energy tax variable

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I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

that reflects environmental regulation (Xie et al., 2021) and strategic

strategy (BUSINESS_STRATEGY), political stability (POLITICAL_STABILITY), regulatory quality (REGULATORY_QUALITY) and GDP growth rate (GDP_GROWTH). The description of each variable is reported in Table 1.
Note: This table reports the correlation matrix. Our independent variables are internal finance (INTERNAL_FINANCE), external finance (EXTERNAL_FINANCE) and financial constraints (FINANCIAL_CONSTRAINT). The
instrumental variables are internal working capital financing (INTERNAL_WCF) and external working capital financing (EXTERNAL_WCF). The control variables firm size (FIRM_SIZE), corporate governance body
(GOV_BODY), strategic environmental management (STRATEG_ENV), energy tax (ENERGY_TAX), research and development expenditures (R&D_EXPENDITURES), customer pressure (CUSTOMER_PRESSURE), business
1.020
2.620
1.070
1.070
1.270
1.280
1.250
1.050
1.030
1.140
1.150
1.270
1.550
1.610
1.080
environmental objective, which empowers companies to investment in

VIF
green projects. Furthermore, we incorporate research and development
expenditures and customer pressure that are considered among green
investment drivers. Besides, we involve business strategy variable. We

1.000
(15)

also control for macro-economic characteristics by using the gross do­

mestic growth, political stability and regulatory quality obtained from
the World Bank database. Finally, country fixed effects are introduced in

1.000
0.206
(14)

our models. All variables are accurately presented in Table 1.

3.3. Research model

1.000
0.573
0.158
(13)

To conduct our empirical investigations, we opted for a two-stage

− 0.024
regression analysis to address potential endogeneity and causality
− 0.099
− 0.083
1.000

problems. Endogeneity biases are a significant concern that can result in

(12)

erroneous empirical estimations and lead to irrelevant deductions and

implications (Ullah et al., 2018). Endogeneity arises when the inde­
pendent variable is correlated with the error term (Lu et al., 2018). This
− 0.041

− 0.073
1.000
0.209

0.005
(11)

endogeneity concern may arise from three main sources: simultaneous

causality, omitted variables, and errors in variables (Zaefarian et al.,
2017). Thereby, several methods can be employed to solve the endo­
− 0.006

− 0.073

geneity concerns such as the generalized method of moments (GMM) for

1.000
0.245
0.217

0.037
(10)

panel data and two-stage least squares (2SLS) for survey data that we
have used in our study (Chaibi and Ftiti, 2015; Ullah et al., 2021).
Accordingly, the first stage consists of regressing our independent var­
1.000
0.060
0.096
0.073
0.063
0.084
0.082

iables on the instrumental ones. Then, we introduce the predicted values

(9)

in the second stage as independent variable in our main model. We

include two instrumental variables in our regressions that are internal
− 0.018

working capital financing (INTERNAL_WCF) and external working

1.000
0.067
0.129
0.166
0.126
0.023
0.027
(8)

capital financing (EXTERNAL_WCF). The working capital provide

companies to fulfil their short-term financial needs. It enables firms to
broaden business activities and hence boost long term investments.
− 0.027

− 0.093
1.000
0.086
0.068
0.150
0.154
0.330

0.062

Salehi (2012) argued that working capital has a significant relationship

(7)

with fixed assets. To estimate our regressions, we use these following

models:
− 0.002
− 0.045
− 0.066
1.000
0.343
0.117
0.078
0.235
0.222
0.336

FINANCEi,t = β0 + β1 INTERNAL WCFi,t + β2 EXTERNAL WCFi,t

(6)

∑10
+ β Zki,t + ωi +ε1i,t
i=1 K
(1)
− 0.015

− 0.066
− 0.007
− 0.021
1.000

0.004
0.019
0.057
0.010
0.035
0.030

∑10
̂ i,t +
GREEN INVi,t = α0 + α1 FINANCE αK Zki,t +ωi + ε2i,t (2)
(5)

i=1

Where (i) and (t) represent company and country indices, respectively.
− 0.376

− 0.032
− 0.050
− 0.009
− 0.047
− 0.023

− 0.009

FINANCE introduces the vector of dependant variable including internal

1.000

0.009
0.001

0.062

0.002

financing (INTERNAL_FINANCE), leverage (LEVERAGE) and financial

(4)

constraints (FIN_CONSTRAINT). GREEN_INV indicates our independent

variable that has been already determined by the principal component
− 0.011
− 0.007
− 0.067
− 0.024
− 0.047
− 0.037
− 0.081
− 0.044
− 0.042
− 0.197
− 0.191
1.000

0.028

analysis. The instrumental variables are internal working capital

(3)

financing (INTERNAL_WCF) and external working capital financing

(EXTERNAL_WCF). Z denotes our control variables: firm size (FIRM_­
SIZE), corporate governance body (GOV_BODY), strategic environ­
− 0.001
− 0.038
1.000

0.021
0.042
0.026
0.010
0.026
0.017
0.038
0.022
0.097
0.075
0.055

mental management (STRATEG_ENV), energy tax (ENERGY_TAX),

(2)

research and development expenditures (R&D_EXPENDITURES),

customer pressure (CUSTOMER_PRESSURE), business strategy (BUSI­
− 0.484

− 0.035
− 0.034
− 0.010

− 0.014
− 0.013
− 0.017
− 0.037
− 0.076
− 0.048
− 0.061

NESS_STRATEGY), political stability (POLITICAL_STABILITY), regula­

1.000

0.001
0.061

0.019

tory quality (REGULATORY_QUALITY) and GDP growth rate

(1)

(GDP_GROWTH). βk and αk correspond to our model’s parameters. ωi

denotes country fixed effects. ε1 and ε2 are the term errors.
(3)FINANCIAL_CONSTRAINT

(14)REGULATORY_QUALITY
(11)CUSTOMER_PRESSURE

(13)POLITICAL_STABILITY
(12)BUSINESS_STRATEGY
(10)R&D_EXPENDITURES
(7)GOVERNANCE_BODY
(1)INTERNAL_FINANCE

4. Descriptive statistics and results

(5)EXTERNAL_WCF
Correlation matrix.

(4)INTERNAL_WCF

(15)GDP_GROWTH
(8)STRATEG_ENV
(9)ENERGY_TAX

4.1. Descriptive statistics

(2)LEVERAGE

(6)FIRM_SIZE

Table 4 reports the descriptive statistics. Summary statistics point

Table 5

out that internal finance represents 74 % on average while leverage

stands for 17.3 %. This finding confirms that SMEs draw principally on

6
I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 6
2SLS regressions of the effect of financing sources on green investment and environmental performance.
First Stage Equation (1) Equation (4) IVProbit First Stage Equation (2) Equation (4) IVProbit
2SLS 2SLS

Green investment Environmental Green investment Environmental

Performance Performance

INTERNAL_WCF 0.131*** (0.037) − 0.071**

EXTERNAL_WCF 0.079** (0.039) (0.031)
− 0.080**
(0.038)
INTERNAL_FINANCE 0.987** (0.501) 2.271*** (0.297) − 1.718** − 3.041*** (0.265)
LEVERAGE (1.026)
FIRM_SIZE − 0.006 (0.005) 0.061*** (0.011) 0.085*** (0.021) 0.007* (0.004) 0.066*** (0.014) 0.069*** (0.023)
GOVERNANCE_BODY 0.003 (0.014) 0.152*** (0.031) 0.165*** (0.063) 0.008 (0.012) 0.170*** (0.035) 0.154** (0.064)
STRATEG_ENV − 0.004 (0.008) 0.046** (0.018) 0.072** (0.031) − 0.002 (0.007) 0.036* (0.020) 0.037 (0.031)
ENERGY_TAX 0.003 (0.014) 0.134*** (0.030) 0.131** (0.057) 0.006 (0.012) 0.147*** (0.035) 0.114** (0.057)
R&D_EXPENDITURES − 0.001 (0.008) 0.135*** (0.017) 0.184*** (0.049) 0.000 (0.007) 0.133*** (0.019) 0.131** (0.057)
CUSTOMER_PRESSURE − 0.007 (0.018) 0.331*** (0.038) 0.479*** (0.114) 0.026* (0.015) 0.369*** (0.051) 0.417*** (0.126)
BUSINESS_STRATEGY − 0.022* (0.014) 0.121*** (0.031) 0.115** (0.046) 0.004 (0.012) 0.107*** (0.033) 0.061 (0.045)
POLITICAL_STABILITY − 0.036*** − 0.039 (0.028) 0.121*** (0.036) 0.036*** − 0.011 (0.043) 0.141*** (0.034)
(0.011) (0.009)
REGULATORY_QUALITY 0.001 (0.014) 0.109*** (0.029) 0.058 (0.047) 0.009 (0.012) 0.126*** (0.034) 0.068 (0.044)
GDP_GROWTH − 0.016*** 0.004 (0.014) 0.023 (0.019) 0.011** (0.004) 0.007 (0.017) 0.023 (0.018)
(0.005)
Constant 0.735*** (0.045) − 1.268*** − 2.084*** (0.238) 0.142*** − 0.290*** 0.144 (0.106)
(0.433) (0.039) (0.104)
COUNTRY Effects Yes Yes Yes Yes Yes Yes
Durbin–Wu–Hausman test Chi2 (1)
(p)
Anderson underid. test Chi2 (1) (p) 5.027 (0.0249) 4.427 (0.035)
Sargan overid. test Chi2 (1) (p) 18.051 (0.0001) 15.02 (0.0001) 7.491 (0.0236) 12.52 (0.0004)
Cragg-Donald Wald Fstatistic 2.277 (0.1313) 2.052 (0.1520)
Wald test of exogeneity Chi2 (1) (p) 9.039 3.739
R2 0.016 0.017

Note: This table presents the two-stage least squares regression (2SLS) results of the impact of financing sources on green investment and environmental performance.
The independent variable is financing sources that involves internal finance (INTERNAL_FINANCE) and leverage (LEVERAGE). The dependent variables are green
investment estimated from the PCA (GREEN_INV) and environmental performance. The instrumental variables are internal working capital financing (INTER­
NAL_WCF) and external working capital financing (EXTERNAL_WCF). The control variables firm size (FIRM_SIZE), corporate governance body (GOV_BODY), strategic
environmental management (STRATEG_ENV), energy tax (ENERGY_TAX), research and development expenditures (R&D_EXPENDITURES), customer pressure
(CUSTOMER_PRESSURE), business strategy (BUSINESS_STRATEGY), political stability (POLITICAL_STABILITY), regulatory quality (REGULATORY_QUALITY) and
GDP growth rate (GDP_GROWTH). ***, **, and * represent significance at the 1%, 5%, and 10% levels, respectively. Values in the parentheses are the standard errors.
The description of each variable is summarized in Table 1. 4200 observations.

internal sources in their financing decisions. Besides, the statistics present a significant impact on green investment. The results show that
highlight that 33.5 % of our studied SMEs confront financial constraints internal finance influences positively and significantly green investment
in their investment projects. Correspondingly, SMEs face several ob­ and environmental performance, confirming our first hypothesis. This is
stacles to finance their responsible approaches. Regarding environ­ consistent with Islam et al. (2021) who argue that a rise in cash flows
mental variables, 67.2 % of our Eastern European SMEs succeed to and slack resources is associated with an increase in responsible in­
achieve environmental performance, it means that their green strategies vestments. In the same line, Denis and Sibilkov (2010) underline that
tend to reduce their environmental footprints given that 23 % of the higher cash holdings enable constrained companies to perform
firms undertake strategic purposes of environmental responsibility 64 % increasing value investments. These findings corroborate also with the
adopt green investments. In addition, 24.5 % of companies were subject pecking order theory highlighting that SMEs rely primarily on their
to an energy tax. Finally, Table 5 reports the correlation matrix and the available internal funds to undertake new investments. In contrast, the
variance inflation factors (VIF) that confirm the absence of findings prove that leverage has a significant and negative effect on
multicollinearity. green investment and environmental performance, which affirm our
second hypothesis. This negative impact is in line with Chang et al.
(2021) and Vo et al. (2019) and confirm the underinvestment theory.
4.2. Results These results imply that debt finance provide higher costs funds for
SMEs on account of the lack of collateral and less experience. Indeed,
Table 6 reports the two stages least squares (2SLS) results of the these empirical findings underline that high level of debt can lessen the
impact of financing sources on green investment and environmental discretionary funds and rise the financial risk of SMEs, which hamper
performance. The first stage findings show that our instrumental vari­ thus managers to get involved in new green investments. The outputs of
ables have a significant influence on green investment. We perform Table 7 evidence that financial constraints have a significant and
several tests in order to verify the validity of our instruments. The Sar­ negative effect not only on green investment but also on environmental
gan over-identification test demonstrates p-values of 0.1383 and 0.1395 performance based on our instrumental probit regression (IVProbit).
confirming the validity of our instruments that are not correlated with Thus, our third hypothesis is accepted. These results can be explained by
the standard errors. The Anderson test reveals significant p-values of the fact that SMEs are more likely to encounter agency problems and
0.0001 rejecting the under-identification hypothesis. The Gragg-Donald information asymmetry generating the increasing of financial costs
test indicates the absence of weak identification problems disclosing F- related to debt finance comparing to internal ones. Accordingly, our
values of 9.107 and 9.313. results emphasized that internal finance represents a major player in
The two-stage least squares analysis indicates that financing sources

7
I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 7 responsible investments and thus allocate more internal resources in

2SLS and IV Probit regressions of the impact of financial constraints on green financing green initiatives.
investment and environmental performance. Regarding control variables, the results demonstrate that firm size
First Stage Second Stage has a positive and significant impact on green investment since large
Equation (3) Equation (4)
companies dispose of sufficient resources to invest in responsible stra­
2SLS IVProbit tegies. Disposing of a governance body boosts companies to decide on
Green Environmental implementing green policies. In the same line, adopting strategic envi­
investment Performance ronmental target and having a pertinent business strategy influence
INTERNAL_WCF − 0.087** positively green investment. The results show that being subject to en­
(0.039) ergy tax as well as customer pressure lead companies to invest more in
EXTERNAL_WCF − 0.097** environmental schemes. Concerning macroeconomic variables, regula­
(0.041)
FINANCIAL_ CONSTRAINT − 2.019* − 2.628***
tory quality presents a positive influence on green investment in the
(1.096) (0.151) Eastern European countries.
FIRM_SIZE − 0.014*** 0.026 0.005 (0.029)
(0.005) (0.021) 4.3. Robustness analysis
GOVERNANCE_BODY 0.024 0.204*** 0.173** (0.069)
(0.015) (0.048)
STRATEG_ENV − 0.012 0.017 0.002 (0.034) In order to check the robustness of our results, we use the propensity
(0.009) (0.026) score matching (PSM) considering the treatment of environmental per­
ENERGY_TAX − 0.010 0.113*** 0.054 (0.063) formance. The extant literature evidence the relevance of achieving
(0.015) (0.041)
environmental performance while adopting green strategies within
R&D_EXPENDITURES − 0.024*** 0.085** 0.043 (0.066)
(0.008) (0.034)
companies and its impact on financing decisions. Indeed, firms, which
CUSTOMER_PRESSURE − 0.013 0.296*** 0.235 (0.155) achieve high environmental performance, acquire market and political
(0.019) (0.051) legitimacy that foster their financing opportunities and thereby diminish
BUSINESS_STRATEGY − 0.021 0.055 − 0.011 (0.047) financial constraints (Cheng et al., 2014; Liu et al., 2021). In effect, CSR
(0.014) (0.044)
performance improves stakeholder engagement and alleviates potential
POLITICAL_STABILITY − 0.071*** − 0.215** − 0.164***
(0.011) (0.083) (0.041) agency costs. Furthermore, companies with strong CSR performance
REGULATORY_QUALITY − 0.093*** − 0.079 − 0.214*** dispose of more transparency and accountability that restrain informa­
(0.014) (0.108) (0.051) tional asymmetries. Consequently, these firms are more likely to gain
GDP_GROWTH 0.022*** 0.034 0.051*** (0.018)
financial opportunities.
(0.006) (0.029)
Constant 0.305*** 0.007 0.473*** (0.117)
We apply the propensity score matching method consisting of
(0.048) (0.248) developing the propensity score by matching the treated units with non-
COUNTRY Effects Yes Yes Yes treated units of similar properties. We redress differences between firms
Durbin–Wu–Hausman test 8.57 (0.0034) reaching environmental performance and those none. For this purpose,
Chi2(1) (p)
we conduct probit regression in order to estimate propensity score.
Anderson underid. test 6.6398
Chi2(1) (p) (0.0100) Thereby, we incorporate our control variables including firm charac­
Sargan overid. test Chi2(1) 5.715 teristics firm size (FIRM_SIZE, GOVERNANCE_BODY, BUSI­
(p) (0.0574) NESS_STRATEGY, R&D_EXPENDITURES), environmental variables
Cragg-Donald Wald 0.230 (STRATEG_ENV, ENERGY_TAX, CUSTOMER_PRESSURE) and macro­
Fstatistic (0.6317)
Wald test of exogeneity 2.851
economic variables (POLITICAL_STABILITY, REGULATORY_QUALITY,
Chi2(1) (p) GDP_GROWTH).
R2 0.065 0.383 We use the Kernel matching that consists of determining the
Pseudo R2 weighted average of all individuals in the control group. Table 8 reports
This table reports the regressions results investigating the impact of financial the average treatment effect with the difference between treated and
constraints on green investment and environmental performance. For the green untreated group. We restrain our sample to common support by
investment, we conduct a two stage least squares regression (2SLS) otherwise, considering only on support observations. Moreover, we perform the
we perform an instrumental probit estimator (IVProbit) for environmental balance test introduced in Table 9. Fig. 2 introduces the Kernel distri­
performance. The independent variable is financial constraints. The instru­ bution of propensity score before and after matching. It demonstrates
mental variables are internal working capital financing (INTERNAL_WCF) and that the common support hypothesis is verified since the kernel density
external working capital financing (EXTERNAL_WCF). The control variables
of the two groups is adjacent.
incorporate firm size (FIRM_SIZE), corporate governance body (GOV_BODY),
In the light of matching results, we investigate the impact of
strategic environmental management (STRATEG_ENV), energy tax (ENER­
GY_TAX), research and development expenditures (R&D_EXPENDITURES),
financing sources and financial constraints on green investment
customer pressure (CUSTOMER_PRESSURE), business strategy (BUSI­ excluding the “off-support” observations. These results presented in
NESS_STRATEGY), political stability (POLITICAL_STABILITY), regulatory qual­ Table 10 corroborated with our previous findings. They substantiated
ity (REGULATORY_QUALITY) and GDP growth rate (GDP_GROWTH). ***, **, that internal finance influences positively green investment within SMEs
and * represent significance at the 1%, 5%, and 10% levels, respectively. Values while leverage as well as financial constraints have a negative impact on
in the parentheses are the standard errors. The description of each variable is green practices in accordance with the pecking order theory.
summarized in Table 1. 4200 observations.
5. Conclusion
promoting green investment within SMEs while external sources
constrain companies to get engaged in green projects and reach envi­ Adopting sustainable practices in business strategies has become
ronmental performance. Therefore, our study generates a relevant un­ fundamental for companies that are in part responsible of the environ­
derstanding of the interaction between financing sources and green mental degradation. Accordingly, green investment is crucial not only
investment providing multiple implications for SMEs to foster green for large companies but also for small and medium enterprises that have
policies. In fact, managers are solicited to remove financial constraints a prominent role in the Eastern European economies. Nevertheless,
and alleviate higher financial costs supported by SMEs. Thereby, they these companies dispose of limited financial constraints to undertake
are applied for alleviating SMEs dependency on debt finance to fund responsible strategies and reach environmental performance. In our

8
I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 8
The average treatment effect.
INTERNAL_FINANCE LEVERAGE FINANC_CONSTRAINT

Treated Controls ATET Treated Controls ATET Treated Controls ATET

GREEN_INVESTMENT 0.269 − 0.626 0.845*** (0.038) 0.269 − 0.626 0.810*** (0.039) 0.269 − 0.626 0.814*** (0.035)

Treatment Common support

Assignment Off support On support Total

Untreated 0 1106 1106
Treated 86 2249 2249
Total 3355 3355 3355

Note: Table 8 reports the average-treatment-effect and the difference between the treated and control population. ***, **, and * represent P-Values significance at the
1%, 5%, and 10% levels, respectively. Values in the parentheses are standard errors. This table introduces also the on support and off support observations.

Table 9
Propensity score matching test.
Mean t-test

Treated Control %bias t

INTERNAL_FINANCE 0.741 0.738 14.100 0.350***

LEVERAGE 0.173 0.261 − 13.900 − 0.320***
FINANCIAL_ CONSTRAINT 0.148 0.210 − 15.800 − 5.330***
FIRM_SIZE 3.547 3.420 9.4 3.120**
GOVERNANCE_BODY 0.350 0.366 − 3.500 − 1.050
STRATEG_ENV 0.212 0.167 6.8 2.140**
MONETARY_LOSS 0.025 0.021 2.7 0.810
ENERGY_TAX 0.263 0.258 1.3 0.420
R&D_EXPENDITURES 0.388 0.372 2.2 0.620
CUSTOMER_PRESSURE 0.178 0.202 − 7.300 − 1.980**
BUSINESS_STRATEGY 0.487 0.455 6.5 2.070**
POLITICAL_STABILITY 0.256 0.292 − 5.200 − 1.750*
REGULATORY_QUALITY 0.547 0.622 − 13.500 − 4.390***
GDP_GROWTH 4.130 4.184 − 4.500 − 1.530

Ps R2 LR chi2 p > chi2 MeanBias MedBias B R %Var

0.013 77.05 0.000 5.8 4.9 26.8* 0.9 38

Note: This table presents the propensity score matching test. The financing variables represent our independent that are internal finance (INTERNAL_FINANCE),
leverage (LEVERAGE) and financial constraints (FINANCIAL_ CONSTRAINT). The dependent variable is green investment estimated from the PCA (GREEN_INV) and
environmental performance. The instrumental variables are internal working capital financing (INTERNAL_WCF) and external working capital financing (EXTER­
NAL_WCF). The control variables firm size (FIRM_SIZE), corporate governance body (GOV_BODY), strategic environmental management (STRATEG_ENV), energy tax
(ENERGY_TAX), research and development expenditures (R&D_EXPENDITURES), customer pressure (CUSTOMER_PRESSURE), business strategy (BUSI­
NESS_STRATEGY), political stability (POLITICAL_STABILITY), regulatory quality (REGULATORY_QUALITY) and GDP growth rate (GDP_GROWTH). ***, **, and *
represent P-Values significance at the 1%, 5%, and 10% levels, respectively.

Fig. 2. Kernel distribution before and after matching.

study, we investigated the relationship between financing sources and squares analysis (2SLS) and instrumental probit (IV Probit) to address
green investment in the context of Eastern European SMEs. We con­ endogeneity and causality concerns. Our results showed that internal
structed a green investment proxy based on the principal component finance is positively associated with green investment. However,
methodology. The analysis reveals two principal pillars: pure green in­ leverage and financial constraints have a negative impact on green in­
vestment and mixed green investment. Then, we ran two-stage least vestment and environmental performance. Besides their resource’s

9
I. Bouchmel et al. Journal of Environmental Management 353 (2024) 120230

Table 10 policies to encounter the high cost of capital and the shortage of green
The effect of financing sources and financial constraints on green investment projects. Recently, the Russia-Ukraine war rises the level of economic
after PSM. uncertainty and instability in the business, affecting the Eastern Euro­
Equation (5) Equation (6) Equation (7) pean region that has considerable economic ties with Russia (Prohorovs,
2SLS 2SLS 2SLS 2022). This war caused serious biodiversity damage, pollution, waste of
Green investment natural resources and energy, engendering huge economic losses.
Nevertheless, the post-war period might be an opportunity to promote
INTERNAL_FINANCE 0.976* (0.513) − 0.971* − 2.214*
LEVERAGE (0.507) (1.227) the green transition and elaborate green finance strategies, more spe­
FINANCIAL_CONSTRAINT cifically for SMEs that face huge financial barriers as proved in our
FIRM_SIZE 0.057*** 0.057*** 0.022 (0.022) research. Future research should investigate the impact of green
(0.011) (0.011) financing policies on sustainable investments during the post-conflict
GOVERNANCE_BODY 0.154*** 0.154*** 0.215***
(0.031) (0.031) (0.054)
period, in order to highlight the role of green financial instruments in
STRATEG_ENV 0.046** 0.045** 0.014 (0.028) fostering the environmental engagement of SMEs.
(0.018) (0.018)
ENERGY_TAX 0.135*** 0.136*** 0.115**
CRediT authorship contribution statement
(0.031) (0.031) (0.044)
R&D_EXPENDITURES 0.135*** 0.135*** 0.086**
(0.018) (0.018) (0.036) Imen Bouchmel: Data curation, Formal analysis, Investigation,
CUSTOMER_PRESSURE 0.337*** 0.337*** 0.308*** Methodology, Software, Writing – original draft, Writing – review &
(0.040) (0.040) (0.055) editing, Resources, Visualization. Zied Ftiti: Conceptualization, Formal
BUSINESS_STRATEGY 0.122*** 0.123*** 0.050 (0.048)
(0.032) (0.032)
analysis, Methodology, Project administration, Supervision, Validation,
POLITICAL_STABILITY − 0.043 (0.028) − 0.041 (0.028) − 0.237** Writing – original draft, Writing – review & editing, Investigation. Waël
(0.097) Louhich: Conceptualization, Formal analysis, Methodology, Project
REGULATORY_QUALITY 0.113*** 0.113*** − 0.100 administration, Supervision, Validation, Writing – original draft,
(0.029) (0.029) (0.123)
Writing – review & editing, Investigation. Abdelwahed Omri:
GDP_GROWTH 0.007 (0.014) 0.006 (0.014) 0.042 (0.033)
Constant − 1.260*** − 0.285*** 0.038 (0.270) Conceptualization, Supervision, Validation, Writing – review & editing,
(0.443) (0.094) Investigation, Project administration.
COUNTRY Effects Yes Yes Yes

Note: This table reports the regressions results investigating the impact of in­
Declaration of competing interest
ternal finance, leverage and financial constraints on green investment after the
propensity score matching.
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
scarcity, SMEs operating in the Eastern European region face critical
the work reported in this paper.
financial constraints that impede them to adopt responsible investments
to reduce their considerable environmental footprints. These findings
Data availability
are in line with the pecking order theory as well as agency theory. In
fact, SMEs encounter higher financial costs on grounds of agency
Data will be made available on request.
problems and information asymmetry. Our results have been robust and
continue to hold while applying the propensity score matching and
considering the impact of environmental performance. In fact, envi­ References
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