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

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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.

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Authors and Affiliations

  1. RH Smith School of Business, Department of Accounting, University of Maryland at College Park, College Park, MD, 20742-1815, USA

    Katherine Campbell

  2. Business School, Department of Accounting, University of Washington, Box 353200, Seattle, WA, 98195-3200, USA

    Stephan E. Sefcik

  3. College of Business & Administration, Accounting & Business Law, University of Colorado at Boulder, 419 UCB, Boulder, CO, 80309-0419, USA

    Naomi S. Soderstrom

Authors
  1. Katherine Campbell
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  2. Stephan E. Sefcik
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  3. Naomi S. Soderstrom
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Correspondence to Naomi S. Soderstrom.

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Campbell, K., Sefcik, S.E. & Soderstrom, N.S. Disclosure of Private Information and Reduction of Uncertainty: Environmental Liabilities in the Chemical Industry. Review of Quantitative Finance and Accounting 21, 349–378 (2003). https://doi.org/10.1023/B:REQU.0000004783.24513.ea

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