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

Academy of Accounting and Financial Studies Journal, Sept, 2008 by Carol A. Cox

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