Valuation analysis of mandatory and discretionary environmental disclosures

This study investigates actual environmental performance and the environmental disclosures made by publicly-traded firms. One type of disclosure examined is the mandatory disclosure in which the firm reports liabilities and contingencies associated with: (1) previously incurred environmental remediation, and/or (2) compliance with environmental regulation. The second type of disclosure is the discretionary disclosure, which typically reports on the firm's actions taken to reduce environmental degradation by such measures as minimizing waste, retooling products, and investing in an environmental management system.;A valuation model is employed to test whether disclosure of internally and externally generated environmental information is value-relevant to investors. Three sets of financial and non-financial information are developed to examine the association between firm market value and (1) actual environmental performance, (2) mandatory disclosures, and (3) discretionary disclosures.;The results suggest that, contrary to previous studies, number of Superfund sites is not considered a significant indicator of future environmental liabilities. However, the release of toxic chemicals is perceived as having a negative impact on market value. Of the mandatory disclosures made by firms, investors appear to place value on detailed legal proceedings, qualitative information about future expenditures, current remediation costs, and projected future capital expenditures. External validation of environmentally responsible actions has a positively significant association with market value. Internally-provided voluntary disclosures are not as value-relevant--an established audit program, a total quality environmental management system, and consideration of supplier's environmental standing are all only marginally significant.;The results of the examination of specific types of environmental information used by investors should be of interest to accounting rule-makers as they attempt to define and establish the degree and type of disclosures that firms should make regarding their environmental responsibilities. In addition, the results may assist firms by allowing them to focus on the disclosure of more useful information, and thereby eliminate unnecessary costs.