Site Hazard, Settlement Activity, and Superfund Liability Valuation

The amount and timing of a firms' ultimate financial obligation for contingent environmental liabilities is uncertain and subject to the outcome of future events. We decompose uncertainty about Superfund contingent liabilities into two sources: 1) uncertainty regarding extent of site contamination and clean-up (site uncertainty); and 2) uncertainty regarding allocation of clean-up costs across multiple parties associated with the site (allocation uncertainty). We hypothesize that site and allocation uncertainty surrounding contingent Superfund liabilities affect their market valuation. We find that site hazard level negatively affects valuation of contingent Superfund liabilities (increasing site uncertainty surrounding clean- up cost as hazard levels increase) and settlement activity has a favorable effect (reducing allocation uncertainty as resolution on sites is reached). We also investigate the valuation impact for different industries and across regulatory regimes. We find that contingent Superfund liabilities are valued differentially across industries and are more value-relevant following reauthorization of the Superfund Act