HOW ENVIRONMENTAL LIABILITIES AFFECT FIRM VALUATION AND INVESTOR DECISIONS

Abstract

This study examines the impact of environmental liabilities on the stock price and market value of a firm. The authors specifically investigate the effect of the designation of a company as a potentially responsible party (PRP) on the National Priority List (NPL) for the Superfund site. The study aims to determine if this designation generates more negative abnormal returns after listing the NPL, as it increases regulatory costs such as cleanup costs and disclosure requirements. The empirical results support the hypothesis that the market reacts negatively to the bad news that the firm has been designated as a PRP on the Superfund site.

The study provides investors with useful information about contingent environmental liabilities, allowing for more reliable investment decisions and better judgments on the firm's future performance. Moreover, the article highlights the significant potential liabilities of firms under the Superfund Act's provisions and the uncertainty and timing issues associated with accounting for environmental liabilities.

The article concludes that environmental liabilities have a substantial impact on firm value, and investors consider such information when making investment decisions. This study underscores the importance of monitoring and disclosing environmental liabilities to avoid negative market reactions and economic losses