THE IMPACT OF ENVIRONMENTAL LIABILITIES ON THE STOCK PRICE AND MARKET VALUE

Keywords: Environmental Liabilities, Superfund Sites, Stock Prices, Cumulative Abnormal Returns, Pollution

Abstract

This study examines the effect on the security returns of a company named on the National Priority List (NPL) for the Superfund site. It investigates if the designation as a potentially responsible party (PRP) generates more negative abnormal returns after listing the NPL. Since this designation of firms as PRPs increase regulatory costs such as cleanup costs and disclosure requirements, an adverse market reaction is expected. This study employs several financial databases, such as Research Insight, CRSP, I/B/E/S, and the EPA's NPL database, which compile the Superfund listing for each firm in the sample. In the case of environmental liabilities, the potential future cost of environmental remediation makes estimating the firm's earnings more difficult. This implies that the earnings of PRP firms may not persist, resulting in noisier accounting information. The empirical results support the hypotheses that the markets react negatively to the bad news that the firm has been designated as a PRP in the Superfund site, implying that environmental liabilities negatively impact firm stock price and valuation. Significant findings provide financial statement users with helpful information about contingent environmental liabilities and help them make more informed investment decisions and better judge the firms' future performance.

JEL Classification Codes: G1, G2, G3, M41, M48.

Author Biographies

Benjamin Bae

Professor, Department of Accounting and Finance, School of Business and Public Policy, California State University, Bakersfield, USA

Nyakundi M. Michieka

Associate Professor, Department of Economics, School of Business and Public Policy, California State University, Bakersfield

Mahdy F. Elhusseiny

Professor, Department of Accounting and Finance, School of Business and Public Administration, California State University, Bakersfield

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Published
2022-10-06
How to Cite
Bae, B., Michieka, N. M., & Elhusseiny, M. F. (2022). THE IMPACT OF ENVIRONMENTAL LIABILITIES ON THE STOCK PRICE AND MARKET VALUE. International Journal of Accounting & Finance Review, 12(1), 11-20. https://doi.org/10.46281/ijafr.v12i1.1803
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper