Factors associated with the level of superfund liability disclosure in 10K reports: 1991-1997.

Cox, Carol A.

ABSTRACT

This study examines factors associated with the level of Superfund disclosure in 10K reports. Sample firms consist of Fortune 500 companies identified by the Environmental Protection Agency as Potentially Responsible Parties. The study utilizes a comprehensive environmental disclosure index based on Generally Accepted Accounting Principles, to measure the extent to which sample firms disclose environmental liability information. Empirical tests demonstrate that the extent of environmental disclosure is associated with size, profitability, industry classification and regulatory influence.

The study uses data from COMPUSTAT, EDGAR, and the Superfund Public Information System for years 1991-1997. The environmental disclosure index is compiled based on relevant authoritative guidance contained in Regulation S-K, SAB 92, and SFAS 5. Policy implications indicate that the Securities and Exchange Commission must improve monitoring and enforcement efforts designed to promote adequate recognition and disclosure related to environmental liabilities.

INTRODUCTION

Over the past fifteen years, there has been increased attention on the environment and how companies measure and report environmental exposure (Cox, 2001). Compliance with environmental regulations has a significant impact on corporate earnings, particularly for certain industries. Fitzgerald (1996) estimates that in excess of $7 billion a year is spent for U.S. Superfund site remediation. The term "Superfund" refers to the federal trust fund established to pay for environmental cleanup and enforcement. Furthermore, between $500 and $750 billion will be required to remediate all sites identified by the Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation and Liability Act (the Superfund Act) (Lavelle, 1992; Committee on Commerce 1995). Probst et al. (1995) estimate that $6 billion is spent each year pursuant to the Superfund Act and $135 billion is required annually to comply with all federal environmental regulations. In light of the magnitude of estimated costs, the reporting of environmental costs and obligations has become a prominent issue with accounting regulatory and professional bodies, such as the Securities Exchange Commission (SEC), Financial Accounting Standards Board (FASB), American Accounting Association (AAA) and American Institute of Certified Public Accountants (AICPA) (Sack et al, 1995). Of specific concern are the recognition of environmental liabilities and the adequacy of related environmental disclosures (ED).

Recent accounting scandals have resulted in increased public scrutiny of corporate governance and disclosures, and have further heightened the attention on ED (Bibler, 2003). The new regulatory requirements promulgated by the Sarbanes-Oxley Act of 2002 have implications for companies with environmental obligations. United States Senators have asked the Government Accounting Office to examine whether SEC requirements for ED are adequate (Sissell, 2002). Moreover, philanthropic foundations and investment mangers are appealing to the SEC to improve enforcement activities related to ED (Bank, 2002).

Early studies suggest that ED are self-serving and inaccurate, although much of the evidence is anecdotal [Beams and Fertig, 1971; Estes, 1976; Churchill, 1978; Nader, 1978]. A later stream of empirical research, resulting from growing public scrutiny of ED, examines both the content and quality of environmental disclosure (Gamble et al., 1995; Freedman and Wasley, 1990; Rockness, 1985; Wiseman, 1982, Ingram and Frazier, 1980). This research suggests that ED quality is generally low because the disclosures do not adequately reflect the firm's actual environmental liability exposure. In addition, firms generally do not record material environmental liabilities. The public scrutiny of ED as well as the findings of early research led to additional reporting requirements with respect to environmental liabilities, as well as increased oversight of environmental matters by the SEC. Two later studies suggest that firms have increased the extent of ED in response to Staff Accounting Bulletin No. 92 (SAB 92, issued in 1993); however, they have not increased disclosure of accrued amounts for environmental remediation (Stanny, 1998; Barth et al., 1997). Thus, like previous studies, Stanny and Barth et al. conclude that accounting guidance is not successful in promoting the recognition of environmental liabilities.

The current study maintains that while much discretion exists under Generally Accepted Accounting Principles (GAAP), firms are subject to specific, mandatory recognition and disclosure requirements with respect to environmental liabilities. Thus, the current study compiles a comprehensive index of GAAP disclosures related to environmental liabilities, based on relevant authoritative guidance provided by the FASB and SEC. The index is used to measure the extent of ED in the 10K filings of 182 Fortune 500 companies with known potential environmental liabilities, for years 1991-1997. The research question is: Are firm characteristics associated with the amount of ED included in 10K reports? The study examines whether size, industry classification, profitability, and regulatory influence affects the extent of ED provided in 10K reports. Prior research finds the level of social disclosure to be associated with industry and size, but not profitability (Trotman and Bradley, 1981; Cowen et al., 1987; Patten, 1991). Stanny (1998) and Barth et al. (1997) suggest that increased regulation is associated with the level of ED. The current study finds that size, industry classification, profitability, and regulatory influence are significantly associated with the level of ED in 10K reports.

This study contributes to the understanding of ED practices of publicly traded U.S. firms because it measures the extent of ED included in 10K filings using a comprehensive index of relevant GAAP, and it identifies factors that influence the level of ED. Understanding the disclosure practices of publicly traded firms allows investors, creditors, regulators and standard setters to determine the adequacy of ED, and to assess the need for additional reporting guidance. The study contributes to recent discussion between regulators and standard-setters regarding the adequacy of U.S. accounting standards, and how FASB guidance inhibits transparency, which is central to the SEC's goal of full and fair disclosure (Herdman, 2002).

Understanding factors that influence the level of ED is important to researchers that seek to develop a theory of social responsibility disclosure. Prior studies show ED varies greatly with respect to the quantity and quality of information provided (Price Waterhouse, 1992, 1994; Gamble et al., 1995; Kreuze, 1996). Spicer (1978) suggests that a convenient starting point in theory building is the observation and description of the real world and noting correlations between variables of interest. Therefore, several studies investigate characteristics of companies that may be associated with their social responsibility disclosures (Trotman and Bradley, 1981; Cowen et al., 1987; Patten, 1991). The current study provides evidence regarding the association between four independent variables (size, industry, profitability, and regulatory influence) and the level of ED.

The remainder of this paper is presented as follows. Section 2 provides institutional background, summarizing environmental regulation and reporting requirements. Section 3 reviews the relevant ED literature. Section 4 presents the research methodology; including sample selection procedures, model variable descriptions, and hypotheses. Section 5 presents the empirical results and analysis. Section 6 provides discussion and conclusions.

INSTITUTIONAL BACKGROUND

Statement of Position 96-1, Environmental Remediation Liabilities, summarizes the regulatory process with regard to the Superfund Act (AICPA, 1996). The Superfund Act regulates the cleanup of inactive waste disposal sites and spills. The Superfund Act adopted a "polluter pays" philosophy by establishing the right to bill firms associated with sites for their portion of the remediation costs and levying a tax on certain industries to fund orphan sites. Several features of the Superfund Act present challenges for estimating a firm's liability under its provisions. First, the liability is for response and remediation costs, as well as for damages and health assessment and study costs. Depending on the nature of the contamination and the cleanup technology chosen, remediation costs can include initial capital expenditures in the millions of dollars and ongoing operating, maintenance, and monitoring costs for 30 or more years. Moreover, cleanup standards are unspecified. Second, the Superfund Act imposes liability on a broad group of potentially responsible parties (PRPs) that includes the site's current owner, and anyone who: owned or operated the facility when hazardous substances were disposed, generated hazardous substances disposed of at the facility, transported hazardous substances to the disposal facility, and/or arranged for such transportation. Third, the Superfund Act liability is strict, retroactive, and joint and several. Strict liability means that the party is liable without regard to fault. The EPA need not prove negligence. The law is retroactive in that the liability is imposed for actions that may not have violated the law at the time. Under joint and several liability, which is permitted but not required by Section 9607 of the Superfund Act, any PRP can be held responsible for the full cost of cleanup if the harm is indivisible. This means that the "deep pocketed" party is often legally liable for all remediation costs. Other PRPs, if available, could be sued subsequently for their share of cleanup costs. Environmental obligations arising under the Superfund Act are the prime focus of this paper because they include some of the largest cleanup obligations of publicly traded corporations.

GAAP provides specific recognition and disclosure requirements with respect to environmental liabilities. The most relevant GAAP related to environmental liabilities is Statement of Financial Accounting Standards Number 5 (SFAS 5), Accounting for Contingencies (FASB, 1975), which establishes both recognition rules and disclosure rules for contingent liabilities. SFAS 5 states that a loss contingency must be accrued if it is both probable and reasonably estimable. In the context of environmental obligations, the first condition is often met when the EPA notifies the organization of its status as a PRP. The second condition, however, is more difficult to determine. If no accrual is made because one or both conditions are not met, the standard provides disclosure rules for reasonably possible losses. The disclosure should indicate the nature of the contingency and should give an estimate of the possible loss, range of possible losses or state that such an estimate cannot be made.

In addition to the requirements of SFAS 5, firms must comply with guidance issued by the SEC. Most relevant to the current study is Regulation S-K (revised in 1986): Items 101, 103, and 303 (SEC, 2000), and Staff Accounting Bulletin 92 (SAB 92) (SEC, 1993). Regulation S-K provides standard instructions for filing forms under the Securities Act of 1933, Securities Act of 1934, and Energy Policy and Conservation Act of 1935. It describes several items to be included in 10K filings. Items 101, 103, and 303 provide general guidance for disclosure of environmental information in the 10K. Item 101 requires a general description of the business and specific disclosure of the effects that compliance with environmental laws may have on capital expenditures, earnings, and competitive position, when material. In addition, the estimated amount disclosed for capital expenditures should apply to the current and succeeding fiscal years and any future periods in which those expenditures may be material. Item 103 requires disclosure of pending or contemplated administrative or judicial proceedings, whereas, Item 303 requires disclosure of material events and uncertainties known to management that would cause reported financial information to be unrepresentative of future operating results or financial conditions. However, SAB 92 was issued specifically to improve the disclosure of environmental liability information. In particular, it makes it inappropriate to present environmental liabilities net of claims for insurance recovery. SAB 92 also requires additional disclosures related to discounting of liabilities and insurance recoveries.

SFAS 5, Regulation S-K and SAB 92 provide ED requirements for firms with known environmental obligations. Based on this authoritative guidance, the current study utilizes a comprehensive ED index to measure the extent of ED in the 10K reports of sample firms. The resulting measure provides the basis for the examination of factors associated with the level of ED.

RELATED LITERATURE

Studies that investigate the amount and content of ED in annual reports and 10Ks suggest that ED has been largely voluntary (Berthelot et al., 2003). These studies reveal a wide variety of disclosure practices by firms with respect to disclosure quantity and quality. Researchers seek to determine what environmental information companies disclose, and whether or not such disclosures are adequate to meet the needs of various stakeholders. Through descriptive and survey methodologies, prior research suggests that ED quality is generally low, and that firms generally do not record environmental liabilities (Price Waterhouse, 1992, 1994; Gamble et al., 1995; Kreuze, 1996; Walden et al., 1997). Researchers in this area suggest these results are due to vague or inadequate reporting standards with respect to environmental information. The studies, however, do not attempt to determine whether environmental disclosures are consistent with GAAP requirements, thereby utilizing a comprehensive ED index. In addition, the studies are conducted in a vastly different regulatory environment--prior to SAB 92 and increased SEC oversight. Moreover, the studies do not utilize EPA liability data to determine the potential liability exposure of the sample firms. Thus, the current study contributes to this area of research by examining the disclosure practices of firms with known environmental liability exposure, as determined by the EPA. Also, the current study focuses on ED outlined by GAAP, in order to determine the level of GAAP disclosure provided over time.

The current study relates most closely to two prior studies that examine the level of ED in response to SAB 92. Using a sample of 199 firms, Stanny (1998) finds significant increases in the reporting of eight environmental disclosures during the period from 1991-1993. However, because the average per firm increase in accrued liability is an insignificant percentage of market value of equity, the author concludes that SAB 92 has had limited success in improving recognition of environmental liabilities. Using a sample of 257 firms in the auto, chemical, appliances, and utilities industries, Barth et al. (1997) find that regulatory influence is associated with firms' environmental disclosure decisions, and firms with larger estimated liabilities. Additionally, the researchers report increased disclosure over the sample period from 1989-1993. Thus, they conclude that accounting regulations have an effect on environmental disclosure. However, sample firms accrue an environmental liability in only 34% of the sample firm-years. As a result, Barth et al. conclude that firms have considerable discretion with respect to environmental liability disclosures.

The current study differs from previous studies in several ways. Most importantly, the level of ED is measured based on a comprehensive disclosure index of GAAP requirements. In addition, the sample is limited to firms with known potential environmental obligations. Proxies for environmental liability are based directly on cost estimates provided by the EPA in its Record of Decision (ROD). The ROD contains the first publicly available cleanup cost estimates, and it is completed after an extensive EPA investigation. The current study also examines a longer and more recent sample period (1991-1997) than previous research on ED. Moreover, in addition to examining the impact of regulation on ED, the current study examines whether firm characteristics such as size, industry and profitability affect the extent of ED.

RESEARCH METHOD

The sample is taken from the 1997 Fortune 500, which represents companies with the highest revenues, or "the deepest pockets". The sampling procedures are designed to obtain a sample of public U.S. firms with known estimated environmental liabilities (which proxies for regulatory influence), and the ability to pay (as remediation is most often paid by the deep-pocketed firms). Thus, the following conditions must be met for inclusion in the sample: 1) the company must be named as a PRP on at least one Superfund Site throughout the entire sample period (1991-1997), 2) the company must be non-financial and publicly traded, and 3) form 10K data must be available from 1991-1997. Non-financial refers to firms not classified in Standard Industrial Classification (SIC) Division H (finance, insurance). Due to the nature of the business, financial institutions have no or limited environmental exposure and are therefore excluded from the current sample. Because the Fortune 500 list includes companies that must report part or all of their figures to a government agency, private companies that produce a 10K are included. The current study is interested in publicly traded companies, and therefore excludes private companies

Table 1 summarizes the sample selection procedures. The initial sample consists of 245 firms named as a PRP on at least one site in the Superfund Public Information System (SPIS) database. The Standard Industrial Classification (SIC) is then obtained for each sample firm from the Lexus Nexus database. Firms in SIC Division H (finance, insurance) are excluded from the sample. Twenty-seven firms are named to a site not included on the final National Priorities Listing (NPL) and were not issued a Record of Decision (ROD). The Edgar database is used to obtain 10K data for all sample years. Eleven firms did not file 10Ks during the entire sample period from 1991-1997, and are excluded from the sample. Thirteen firms are named as PRPs during the sample period, and therefore do not have liabilities for the entire sample period. The final sample consists of 182 firms in 33 industries. Financial data for sample firms is obtained from 10K filings and from

COMPUSTAT

For the dependent variable, the current study utilizes a comprehensive listing of environmental liability disclosures (ED Index), compiled based on Regulation S-K (items 101, 103 and 303), SAB 92, and SFAS 5. Table 2 summarizes the twenty-nine disclosure items. Firm 10K reports are examined for the presence or absence of specific statements as outlined in the ED Index (for fiscal years 1991-1997). Two reviewers (the author and a research assistant) evaluate each 10K report independently. The reviewers met weekly to discuss independent evaluations and resolve interpretive issues.

The following procedures are performed for each year from 1991-1997:

1) a score of 1 is given for each disclosure item presented in the 10K (based on ED Index). Thus, the environmental disclosure score ranges from 0 (for no disclosure) to a maximum of 10 for years 1991 and 1992 (prior to SAB 92), and from 0 to 29 for years 1993-1997 (including disclosures required by SAB 92), and

2) the environmental disclosure score is divided by the total number of ED index items for each year (10 for years 1991 and 1992; 29 for years 1993-1997). The firms' final score for each sample year represents the percentage of GAAP disclosure (EDgaap). The variable (EDgaap) equally weights the disclosure items.

The independent variables are size, industry, profitability, and regulatory influence. Watts and Zimmerman (1978) suggest an association between company size and social responsibility disclosure. They argue that because political costs reduce management wealth, companies attempt to reduce costs by such devices as social responsibility disclosure campaigns. Since the magnitude of political costs is highly dependent on size, I hypothesize a positive relationship between size and ED (Watts and Zimmerman, 1978). The current study uses the natural log of total assets to proxy for size. Sensitivity analysis is conducted using two alternate size proxies (log of sales and log of market value of equity).

The current study uses dummy variables to identify firms in the five industries included in the Counsel on Economic Priorities (CEP) studies (petroleum, chemical, electric power, paper and pulp, and steel). The CEP identified these five industries as generating significant environmental hazards, thereby requiring substantial environmental disclosure. I therefore hypothesize that companies in these industries will disclose more than companies in other industries.

Cowen et al. (1987) cite profitability as a factor that allows or impels management to provide more extensive social responsibility information. This argument may be related to Zmijewski and Hagerman's (1981) contention that higher net income increases firm visibility. In addition, SEC enforcement activities related to environmental liabilities tend to concentrate on the "deep pocketed" or more profitable firms. Therefore, I hypothesize a positive relationship between profitability and ED. The current study uses return on assets to proxy for profitability.

Similar to Barth et al. (1997), an environmental liability estimate based on data provided by the EPA proxies for regulatory influence. The estimated liability identified by the EPA captures the effect of regulatory pressure or rules pertaining to environmental disclosure. I hypothesize larger liabilities to be associated with increased disclosure. The environmental liability is based on information provided in the ROD, which provides estimated costs of cleanup for Superfund sites. Barth et al. (1997) intend to capture the combined effect of regulatory pressure or rules pertaining to disclosure in general and to environmental disclosure in particular. The following procedures are applied:

1. The Superfund PRP Listing is used to identify the number of sites to which each sample firm is named as of 12/31/1997.

2. The SPIS database is used to obtain the RODs for all sites to which sample firms are named as of 1997. The ROD is examined for each site to obtain the Present Worth Cost (PWC), which represents the present value of the estimated clean up costs for the site.

3. For each site, the total number of PRPs is determined by sorting the Superfund PRP Listing by site number.

4. The number of publicly traded PRPs for each site is obtained using the EDGAR database, and is used to compute an average liability for each site. The average liability is calculated by dividing the PWC by the number of publicly traded PRPs for each site, which indicates the potential for shared responsibility for cleanup.

5. The average liability for each site to which a sample firm is named is then added to obtain a total average liability. The current study uses total average liability as a proxy for potential environmental liability.

The current study estimates the model using ordinary least squares regression (OLS), which requires normally distributed error terms. To increase the probability of normality in the error terms, the variables are transformed using the natural logarithm to allow the distribution to approach normality. The final form of the variables in the base model includes log of total assets (SIZE), log of total average liability, return on assets (ROA) and dummy industry variables. Descriptive statistics for model variables are summarized at Table 3.

The dependent variable (EDgaap) ranges from 0% to 90%, with a mean of 36%. The varying frequencies reveal that firms exercised much discretion in their disclosure practices. Disclosure scores range from 0 to 18, with a mean of 8. Log of assets ranges from 4.78 to 12.62 (in dollars, $119 million to $304 billion), which indicates that the sample consists of large firms. ROA ranges from -.619 to .600, indicating that some sample firms were not profitable, which may affect the ability to pay. Log of total average liability ranges from -3.660 to 5.5 (in dollars, $26,000 to $244 million), which highlights the magnitude of potential environmental obligations after being adjusted to reflect potential shared responsibility.

For sensitivity analysis, the current study uses two alternate proxies for size (log of sales and log of market value of equity). The log of sales ranges from 2.94 to 12.09 (in dollars, $19 million to $178 billion), and log of market value of equity ranges from 1.97 to 12.39 (in dollars, $7 million to $240 billion).

The hypotheses in the alternate form are:

H1: There is a positive association between company size and the amount of ED.

H2: Companies in the petroleum, chemical, electric power, paper and pulp, and steel industries provide more ED than companies in other industries.

H3: There is a positive association between profitability and the amount of ED.

H4: There is a positive association between regulatory influence and the amount of ED.

The complete specification of the regression is EDgaap equals alpha 0 plus alpha 1 SIZE plus alpha 2 CHEM plus alpha 3 OIL plus alpha 4 PAPER plus alpha 5 STEEL plus alpha 6 POWER plus alpha 7 ROA plus alpha 8 total average liability plus an error term, where, Size equals log of total assets; Industry equals indicators that equal 1 for classifications in oil (2-digit SIC 13), chemical (2-digit SIC 28), power (2-digit SIC 49), paper and pulp (2-digit SIC 26), and steel industries (2-digit SIC 33), and 0 otherwise; Profitability equals return on assets (ROA); Regulatory Influence equals total average liability (environmental liability proxy based on liability estimates provided in EPA Records of Decision).

RESULTS

Table 4 provides the estimation results for the current study. The p-values for all model coefficients are based on White's (1980) heteroskedasticity-corrected standard errors. The adjusted R squared for the base model (Model 1) is .181 (p-value .000). The results for Model 2, which introduces industry indicators, show a larger adjusted R squared (.360, p-value .000) than the base model. The comparison of the two models illustrates the incremental value of the industry indicators. The adjusted R squared is improved when industry dummy variables are included in model (Model 2).

The reported findings are insensitive to outliers as identified by the Belsley, Kuh, and Welsch (1980) DFFITS statistics. No DFFITS statistic exceeds the size-adjusted cutoff; therefore, outlier analysis reveals no influential data affecting model coefficients. The Durbin Watson statistics for Model 1 (1.95) and Model 2 (2.01) do not indicate autocorrelation (Studenmund, 1997). Condition Numbers below 30 for Model 1 (22.34) and Model 2 (24.31) do not indicate severe multicollinearity (Studenmund, 1997). As all test statistics are reported using White (1980) standard error estimates, standard diagnostics do not reveal significant problems with the model specifications.

The primary results (Model 2) indicate a positive association between company size and the amount of ED (p-value =.000). The findings support the current hypothesis (H1), and are consistent with prior research (Barth et al., 1997; Patten, 1992, 1991; Cowen et al., 1987). The findings indicate that firms attempt to reduce political costs by increasing social disclosure. Since the magnitude of political costs is highly dependent on size, Watts and Zimmerman (1978) hypothesized that there is positive relationship between size and social disclosure.

The results indicate a negative association between profitability and the amount of ED (pvalue = .000). Prior studies that examine the impact of profitability on social disclosure find no association; however, these studies do not specifically include ED (Cowen et al., 1987; Patten, 1990). Since, the "deep pocketed" party is often legally liable for all remediation costs under the Superfund Act, the current study posits that profitability would impel management to disclose more about the environmental activities of the firm (H3). However, the negative association found between profitability and the amount of ED suggests that less profitable companies disclose more. This finding may be explained within the context of voluntary disclosure literature, which focuses on management's earnings forecasts (Pownall et al., 1993; Skinner, 1994, 1995).

Skinner (1994, 1995) provides evidence consistent with the idea that firms with negative earnings news tend to voluntarily disclose bad news. Pownall, Wasley, and Waymire (1993) also provide evidence that voluntary earnings disclosures tend to convey bad news. Since much variation exists in the ED practices of firms, ED may be explained in the context of voluntary disclosure. Environmental liability exposure may be viewed as bad news, and less profitable firms may be more likely to disclose ED. This is also consistent with more recent studies that suggest there are legal incentives for firms to disclose bad news (Skinner, 1997; Evans et al., 2002).

The results reveal a positive association between the log of total average liability and the amount of ED, which indicates that firms with higher environmental liabilities disclose more (pvalue = .000). Since the total average liability measure is based on EPA liability estimates, this finding reflect firms responding to regulatory influence, and supports the current hypothesis (H4). The results indicate that companies in the petroleum, chemical, paper and pulp, and steel industries provide more ED than companies in other industries (p-values =.000). The findings support the current hypothesis (H2), and are consistent with prior studies that suggest that companies in certain environmentally sensitive industries have greater incentive for projecting a positive social image, and therefore disclose more (Bowman and Haire, 1976; Heinze, 1976; Cowen et al., 1987; Patten, 1991).

The current study uses additional size proxies to check the robustness of the primary results. Separate regressions are run for the base model (Model 1), substituting log of total assets with log of sales (Model 1a) and log of market value of equity (Model 1b). The results indicate that the log of sales (p-value =.083) and log of market value of equity (p-value = .057) are not associated with the percentage of environmental disclosure. The results are contrary to the expectations of the current study, and are not consistent with the primary results. Thus, the primary results are not robust to alternate specifications of size. While log of total assets is associated with environmental disclosure, log of sales and log of market value of equity are not.

Empirical results indicate that the level of environmental disclosures is associated with size, profitability, industry, and regulatory influence. As firms continue to exercise much discretion with respect to environmental disclosure, understanding the determinants of environmental disclosure choice may help regulators in their monitoring and enforcement activities. In addition, the findings may help standard setters determine whether more guidance is needed specifically related to environmental liabilities. Socially conscious investors may find this information useful when evaluating firms' environmental disclosures.

DISCUSSION AND CONCLUSIONS

The current study contributes to the understanding of ED practices of publicly traded U.S. firms because it examines the extent of GAAP disclosures in 10K filings, as well as factors associated with the level of ED. Using a sample of firms that have been identified as potentially responsible parties by the EPA, the current study finds that the extent of environmental disclosure varies between sample firms. Although disclosure scores increased overall during the sample period, the percentage of GAAP disclosures decreased significantly. Firms continued to exercise much discretion. Knowledge of such discretion is important to investors, creditors, regulators and standard setters that expect complete and consistent environmental disclosure practices of public companies.

Policy implications for the SEC include improving efforts to promote adequate environmental disclosures. For the FASB and AICPA, the findings indicate that current authoritative guidance is not effective in promoting consistent and adequate environmental disclosure. Therefore, standard-setters must endeavor to provide comprehensive and specific guidance regarding environmental liabilities that can be consistently applied by firms and readily monitored by the SEC through use of EPA data.

The findings also have implications for creditors and investors, who expect transparency in the disclosures of public companies. The transparency of disclosure in 10K reports is now particularly important in light of the increased attention on financial reporting due to the current wave of corporate secrecy and corruption. The findings of the current study may alert creditors and investors to the inconsistencies in the environmental disclosures of publicly traded firms, further contributing to public distrust of financial reports and the accounting profession.

The current study examines factors related to environmental liability disclosure decisions by estimating the association between ED and proxies for size, industry, profitability, growth and regulatory influence. The findings indicate that size, industry, profitability, and regulatory influence are significantly associated with environmental disclosure decisions. Understanding which firm characteristics are associated with the level of disclosure can assist regulators in better monitoring the disclosure practices of firms. In addition, such understanding can assist investors when evaluating the adequacy of environmental disclosure in financial statements. Researchers interested in building a theory of social disclosure can also benefit from the current findings.

The study contributes to the corporate social reporting literature by providing more recent information, specifically in the context of environmental disclosure. Early literature that examines the determinants of social disclosure choice did not focus exclusively on environmental disclosure. Whereas early studies found no association between profitability and the extent of social disclosure, the current study finds a statistically significant negative association between profitability and environmental disclosure. The study examines a longer period and finds profitability, growth, size, industry classification and environmental liability estimates to be associated with the level of environmental disclosure.

ACKNOWLEDGMENT

Thanks always to my parents Annie and Andrew Cox, for their unending support. I want to also thank each member of my Dissertation Committee at Virginia Commonwealth University: Dr. Ruth W. Epps (Chair), Dr. Benjamin B. Bae, Dr. Kenneth N. Daniels, Dr. Tanya S. Nowlin, and Dr. Benson Wier, for their guidance and direction. In addition, I would like to express my deepest gratitude to the faculty at George Mason University, who provided much needed assistance. Finally, thanks to the faculty in the AAA Mid-Atlantic Region, for providing excellent feedback.

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Table 1: Sample Selection Procedures

 No. of
Selection criteria Firms

1997 Fortune 500 firms named as PRP on SPIS database 245
Firms eliminated:
Financial (SIC Division H) (12)
Firms named to a site with no ROD issued (27)
Firms not publicly traded during entire sample period (11)
Firms added as PRP during the sample period (13)
Final sample for analyses 182

Table 2: Environmental Disclosure Index

Item
 No. Source GAAP Disclosures

 1 Reg. S-K A general description of the business
 Item 101 and specific disclosure of the effects
 that compliance with environmental
 laws, when material

 2 Reg. S-K Estimated amount disclosed for capital
 Item101 expenditures representing current and
 succeeding fiscal years in which those
 expenditures may be material

 3 Reg. S-K Disclosure of pending or contemplated
 Item103 administrative or judicial proceedings

 4 Reg. S-K Disclosure of material events and
 Item 303 uncertainties known to management that
 would cause reported financial information
 to be unrepresentative of future operating
 results

 5 SFAS5 Nature of accrual

 6 SFAS5 Accrued amount

 7 SFAS5 Nature of loss contingency

 8 SFAS5 Estimate of additional possible loss
 or range

 9 SFAS5 Statement that estimate cannot be made

 10 SFAS5 Nature of probable unasserted claims
 that are possibly unfavorable

 11 SAB92 Whether an asset is recorded for
 probable recovery

 12 SAB92 Whether the accrual is undiscounted

 13 SAB92 The discount rate used

 14 SAB92 Expected payments for each of 5
 succeeding years

 15 SAB92 Reconciliation of the undiscounted to
 recognized amounts

 16 SAB92 Material changes in expectations
 explained

 17 SAB92 Circumstances affecting the reliability
 and precision of loss estimates

 18 SAB92 Extent to which unasserted claims are
 reflected in any accrual or may affect
 the magnitude of the contingency

 19 SAB92 Uncertainties with respect to joint
 and several liability

 20 SAB92 Nature and terms of cost sharing
 arrangements with other PRPs

 21 SAB92 Uncertainties with respect to
 insurance claims

 22 SAB92 The extent to which disclosed but
 unrecognized contingent losses are
 expected to be recoverable through
 insurance, etc.

 23 SAB92 Uncertainties about the legal sufficiency
 of insurance claims or solvency of
 insurance carriers

 24 SAB92 The time frame over which accrued or
 unrecognized amounts may be paid out

 25 SAB92 Material components of accruals and
 significant assumptions

 26 SAB92 Recurring costs associated with
 managing hazardous substances and
 pollution in ongoing operations

 27 SAB92 Mandated expenditures to remediate
 previously contaminated sites

 28 SAB92 Other infrequent or nonrecurring
 cleanup expenditures, anticipated but
 not required in the present circumstances

 29 SAB92 Loss disclosure with respect to particular
 environmental sites that are individually
 material

Table 3: Descriptive Statistics for Model Variables

Variable N Minimum Mean

EDgaap 1274 0.000 0.356
(ratio)

Disclosure 1274 0.000 7.990
score

Total assets 1274 119 14,465
(millions)

Log of total 1274 4.780 8.886
assets

ROA (ratio) 1274 -0.619 0.043

Liability 1274 0.026 17.532
(millions)

Log Liability 1274 -3.660 1.729

Sales 1274 19 12,431
(millions)

Log of sales 1274 2.940 8.899

MVE 1209 7 12,176
(millions)

Log MVE 1209 1.970 8.551

Variable Median Maximum St. Dev

EDgaap 0.345 0.900 0.238
(ratio)

Disclosure 8.000 18.000 5.180
score

Total assets 6,201 304,012 30,269
(millions)

Log of total 8.732 12.620 1.037
assets

ROA (ratio) 0.043 0.600 0.071

Liability 6.099 243.929 29.438
(millions)

Log Liability 1.808 5.500 1.705

Sales 6,471 178,174 19,387
(millions)

Log of sales 8.775 12.090 0.945

MVE 5,004 239,539 20,309
(millions)

Log MVE 8.518 12.390 1.406

Table 4: Regression Results

 EDgaap Pred.Sign Model(1)

N 1274
Intercept 0.101(0.069)
SIZE + 0.021(0.000)
ROA + -0.468(0.000)
LIAB + 0.051(0.000)
CHEM
OIL
PAPER
STEEL
POWER
Adj. [R.sup.2] 0.181
Prob F 0.000

 EDgaap Pred.Sign Model(2)

N 1274
Intercept 0.076(0.137)
SIZE + 0.017(0.003)
ROA + -0.524(0.001)
LIAB + 0.044(0.001)
CHEM + 0.186(0.000)
OIL + 0.225(0.001)
PAPER + 0.0984(0.001)
STEEL + 0.188(0.001)
POWER + 0.289(0.001)
Adj. [R.sup.2] 0.360
Prob F 0.000

P-value using White's standard errors. Signed tests are one-tailed.

Legend:

SIZE Log of total assets

ROA Net income/book value of total assets

LIAB Log of total average liability based on EPA estimates

CHEM 1 if firm is in chemical industry (2-digit SIC 28), 0 otherwise

OIL 1 if firm is in oil industry (2-digit SIC 13), 0 otherwise

PAPER 1 if firm is in paper industry (2-digit SIC 26), 0 otherwise

STEEL 1 if firm is in steel industry (2-digit SIC 33), 0 otherwise

POWER 1 if firm is in power industry (2-digit SIC 49), 0 otherwise