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Initiating Disclosure of Environmental Liability Information: An Empirical Analysis of Firm Choice

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Abstract

This paper investigates potential motivations for late adopting U.S. companies to begin disclosing environmental liability amounts in their financial statements. Based on a review of 10-K reports filed from 1998 through 2012, inclusive, we identified 55 firms initiating environmental liability disclosure over the period, with all but three doing so by 2006. Focusing on the disclosers up through 2006, we argue that the companies may have used the disclosure as a tool of impression management to avoid potential stakeholder mis-estimation of previously undisclosed liability exposures. We first compute tests to identify firms that may have begun the disclosure due to (1) materiality and (2) concerns of having proprietary costs imposed upon them due to changes in their environmental media coverage and environmental performance, and we find very few cases where these explanations might hold. For the remaining companies, we compared their newly disclosed liability amount, on average, with the mean level of environmental liability being disclosed by other firms in the year prior to the sample companies’ initiation, and find that it is significantly smaller, thus supporting our impression management argument. Finally, we find that overall level of environmental liability amounts was consistently decreasing over the time frame examined, suggesting that earlier adoption would have made more sense. However, it may also explain why almost no new firms began disclosing after the mid-2000s.

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Notes

  1. As we discuss below, both experimental (e.g., Chan and Milne 1999; Milne and Patten 2002) and market valuation (e.g., Barth and McNichols 1994) studies document that investors value environmental liabilities negatively.

  2. As we note below, we actually examined financial reports filed up through 2012 looking for companies initiating disclosure of actual environmental liability amounts, but found almost no companies did so after 2006. Accordingly, we focus on the 1998–2006 period for our analyses.

  3. Patten (2000) also notes that coverage of environmental accounting issues in practitioner publications increased substantially over the early 1990s.

  4. The other categories of disclosure included past or current capital expenditures for pollution abatement or control, projected future capital expenditures for pollution abatement or control, current or past operating costs for pollution abatement or control, projected future operating costs for pollution abatement or control, current or past expenditures for remediation of hazardous waste cites, projected future expenditures for remediation of hazardous waste cites, and whether companies disclosed a range of potential liability exposures for environmental impacts of the firm.

  5. However, Milne and Patten (2002) also find that provision of other, more positive, environmental disclosures serves to mitigate the negative impact of the environmental liability information.

  6. Obtained with permission from Cho and Patten.

  7. We also examined whether the choice to begin reporting environmental liability amounts in financial reports coincided with the initiation of reporting through stand-alone corporate social responsibility (CSR) reports. Based on information gathered from CorporateRegister.com, no relation appeared to exist between the two disclosure events. Some sample firms had issued a first-time stand-alone report several years before initiating environmental liability disclosure while others issued their first report several years later, and some sample firms have never issued a stand-alone CSR report.

  8. In all cases, the qualitative interpretations of results for our further tests are not changed if Nucor and P.H. Glatfelter are included.

  9. We limit our analysis to only firms initiating disclosure.

  10. In addition to Li et al. (1997), several other recent studies document significant relations between companies’ environmental media coverage and aspects of environmental disclosure. See, e.g., Aerts and Cormier (2009), Brown and Deegan (1998), and Clarkson et al. (2008).

  11. We also computed differences in the mean raw number of articles of an environmental nature. Results, not presented here, were comparable to those for the percentage measures.

  12. The companies with significantly decreased environmental media coverage were Eastman Chemical, Valero, Weyerheauser, Flowserve, Holly Corp., Lennox International, and Modine Manufacturing.

  13. As noted above, we exclude Nucor and P. H. Glatfelter from these additional analyses under the assumption that their disclosure choice was driven by materiality concerns and thus are not strategic decisions.

  14. In non-tabulated sensitivity tests, we repeat our impression management tests including all firms with non-material liabilities. Results are consistent with those we report for the more limited sample, suggesting that impression management may also have played a role in the disclosure choice for the companies with changes in environmental media coverage and environmental performance.

  15. Results are qualitatively similar when we use environmental liabilities as a percentage of total liabilities.

  16. Based on two-digit SIC codes. One sample company had no other firms in its two digit classification making environmental liability disclosures in the year prior to its first provision, and as such, this company is dropped from this analysis.

  17. The averages noted include the newly disclosing companies over the period. However, when these companies are excluded the same basic trend of declining percentages holds.

  18. The need for image enhancement with respect to environmental issues may also have been reduced over the early-to-mid-2000s due to the environmental policies of President George W. Bush. Parenteau (2004, p. 363) claims, for example, “from day one, the Bush Administration has set about the task of systematically and unilaterally dismantling over thirty years of environmental and natural resources law.” Patten (1995) documents that corporate social disclosure decreased over the years of Reagan’s deregulation in the 1980s, and thus if companies perceived the Bush Administration environmental policy as evidence of reduced social and political exposure, they may have seen less need for image enhancing actions. Further exploration of this explanation would appear potentially interesting.

Abbreviations

AICPA:

American Institute of Certified Public Accountants

ASR:

Accounting Series Release

EITF:

Emerging Issues Task Force

EPA:

Environmental Protection Agency

FASB:

Financial Accounting Standards Board

GAO:

Government Accountability Office

MISA:

Municipal and Industrial Strategy for Abatement

MOEE:

Ministry of the Environment and Energy (Ontario)

OSHA:

Occupational Safety and Health Administration

SEC:

Securities and Exchange Commission

SFAC:

Statement of Financial Accounting Concept

SIC:

Standard Industrial Classification

TRI:

Toxics Release Inventory

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Acknowledgments

The authors would like to thank Editor Sally Gunz and are grateful for comments and suggestions provided by two anonynous reviewers, Jonathan Maurice, and the participants of the 2011 North American Congress on Social and Environmental Accounting Research in Montreal and the 4th Italian Conference on Social and Environmental Accounting Research (Italian CSEAR 2012).

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Correspondence to Charles H. Cho.

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Chen, J.C., Cho, C.H. & Patten, D.M. Initiating Disclosure of Environmental Liability Information: An Empirical Analysis of Firm Choice. J Bus Ethics 125, 681–692 (2014). https://doi.org/10.1007/s10551-013-1939-0

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