VALUATION ANALYSIS OF ENVIRONMENTAL DISCLOSURES

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Presentation transcript:

VALUATION ANALYSIS OF ENVIRONMENTAL DISCLOSURES Kathryn A. S. Lancaster Cal Poly State University August 18, 1998

Introduction Motivation Remediation Costs AAA SEC Liaison Committee Sack et al. (1995) Public Interest Groups Krupp (1996) Sustainable Development Motivation S Contributions Examine a more recent time period

Introduction Contribution Examine more recent period than previous studies Barth and McNichols (1994) Consider current authoritative guidance SOP 96-1 AICPA (1996) Examine incremental value of firm disclosures Motivation S Contributions Examine a more recent time period

Research Questions Do investors value firm-specific environmental performance information provided by an external source? Do investors value firm-provided environmental disclosures?

Methodology Stakeholder theory Valuation model Milgrom and Roberts (1992) Gaa (1996) Valuation model (Olson 1995)

Valuation Model

Data Sources 228 S&P 500 firms 1994 Financial Data-Compustat CD 1991-1993 environmental performance data summarized by IRRC Cohen (1995), Campbell et al (1996), Mitchell (1996) Environmental disclosures in 1994 Annual Reports

Variables of Interest

Selected Descriptive Statistics 87% identified as PRP (Superfund sites) 23 2-digit SIC codes represented Primarily manufacturing Average of 11.6 Superfund sites, 21M pounds of TRI releases, $821,000 in penalties per firm

Results

Results Environmental Performance Information regarding “past sins” impounded in stock price Investors are concerned about financial impact of future environmental risks (-) Investors do not appear to value superior environmental performance

Results Environmental Disclosures Description of legal proceedings (-) Qualitative information about future environmental activities (-) Current remediation (+) Future capital expenditures (+)

Conclusions SEC and FASB concern about relevance of environmental disclosures is valid Additional guidance on disclosure of future environmental expenditures Investors perceive that capital expenditures have revenue generating/cost reduction potential