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VALUATION ANALYSIS OF ENVIRONMENTAL DISCLOSURES

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Presentation on theme: "VALUATION ANALYSIS OF ENVIRONMENTAL DISCLOSURES"— Presentation transcript:

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

2 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

3 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

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

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

6 Valuation Model

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

8 Variables of Interest

9 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

10 Results

11 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

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

13 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

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