Disclosure of Private Information and Reduction of Uncertainty: Environmental Liabilities in the Chemical Industry

Disclosure of Private Information and Reduction of Uncertainty: Environmental Liabilities in the... We investigate the potential uncertainty-reducing role of accounting information in the context of contingent Superfund liability valuation. We first develop theoretical arguments for the way reduction of uncertainty regarding these contingent liabilities is expected to affect security prices. Empirical proxies are developed for two types of uncertainty surrounding contingent Superfund liabilities: site uncertainty and allocation uncertainty. In a valuation framework, we then investigate whether financial statement disclosures and accruals reduce uncertainty and thereby affect security valuation. Specifically, we analyze the interaction of private information contained in firm disclosures and accruals with inherent uncertainty surrounding contingent Superfund liabilities. Results suggest that in a regulatory environment allowing substantial reporting discretion, firm-provided financial statement information affects valuation of contingent Superfund liabilities by reducing uncertainty. Further, we find that information revealed through accruals versus disclosures is differentially effective at reducing site and allocation uncertainty. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Disclosure of Private Information and Reduction of Uncertainty: Environmental Liabilities in the Chemical Industry

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/B:REQU.0000004783.24513.ea
Publisher site
See Article on Publisher Site

Abstract

We investigate the potential uncertainty-reducing role of accounting information in the context of contingent Superfund liability valuation. We first develop theoretical arguments for the way reduction of uncertainty regarding these contingent liabilities is expected to affect security prices. Empirical proxies are developed for two types of uncertainty surrounding contingent Superfund liabilities: site uncertainty and allocation uncertainty. In a valuation framework, we then investigate whether financial statement disclosures and accruals reduce uncertainty and thereby affect security valuation. Specifically, we analyze the interaction of private information contained in firm disclosures and accruals with inherent uncertainty surrounding contingent Superfund liabilities. Results suggest that in a regulatory environment allowing substantial reporting discretion, firm-provided financial statement information affects valuation of contingent Superfund liabilities by reducing uncertainty. Further, we find that information revealed through accruals versus disclosures is differentially effective at reducing site and allocation uncertainty.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

  • Factors Influencing Firms' Disclosures about Environmental Liabilities
    Barth, M. E.; McNichols, M. F.; Wilson, G. P.
  • Disclosure Level and the Cost of Equity Capital
    Botosan, C.

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