The Effect of Potential Environmental Liabilities on Earnings Response Coefficients
Posted: 10 Mar 2004
In this study, we investigate the implication of potential environmental liabilities for the reliability (noisiness) of accounting information as it manifests itself in the magnitude of ERC. Multiple regression analyses of abnormal stock returns on earnings surprise and other control variables are carried out. The results provide support for the hypothesis that the ERCs for PRP firms are lower than those of non-PRP firms. Robustness of the results, with regard to the sample selection procedures and inclusion/exclusion of different control variables, was checked as well. In addition, the results indicate that as firms are named as PRP for more sites, their ERCs decline, which is an indication that the market perceived increased noise in their earnings. These results are consistent with the notion that potential environmental liabilities create noise in a firm's accounting system in general and its earnings in particular.
Keywords: Environmental liabilities, Earnings response coefficients, Superfund sites, Cleanup costs
JEL Classification: M41, G12, M52, G32
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