Circular economy practices and their effect on corporate financial performance
Circular economy practices and their effect on corporate financial performance

Summary/Abstract: In this study, we investigate the relationship between circular economy (CE) practices and financial performance in European manufacturing firms. A longitudinal analysis of 200 companies from 2018 to 2022 was conducted using a custom Circular Economy Index (CEI) and various financial metrics. Panel data regression analysis revealed a positive, statistically significant relationship between CEI and financial performance. A one-point increase in CEI was associated with increases of 0.152 percentage points in ROI, 0.087 in Gross Profit Margin, 0.063 in Net Profit Margin, and 0.203 in Total Shareholder Return. Lag analysis showed this relationship strengthened over time, with the effect on ROI increasing from 0.152 (no lag) to 0.225 (3-year lag). Slight diminishing returns were observed at very high levels of circular economy implementation. Subgroup analysis indicated stronger effects for larger firms, high-tech manufacturers, and companies in Northern Europe. Brand value and operational efficiency were identified as partial mediators. These findings provide robust evidence supporting the business case for circular economy transitions in manufacturing, with implications for managerial decision-making and policy development in sustainable manufacturing.

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