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The relations among environmental disclosure, environmental performance,

and economic performance: A simultaneous equations approach

Sulaiman A. Al-Tuwaijri
Department of Accounting and Management Information Systems
College of Industrial Management
King Fahd University of Petroleum and Minerals
KFUPM Box 1996, Dhahran 31261, Saudi Arabia

Theodore E. Christensen*
School of Accountancy and Information Systems
Marriott School of Management
Brigham Young University
540 TNRB, Provo UT 84602-3100, USA

K. E. Hughes II
Department of Accounting
E. J. Ourso College of Business Administration
Louisiana State University
Baton Rouge, LA 70803-6304, USA

April 2003

We appreciate the helpful insights and suggestions provided by Julia DSouza, Robin Dubin, Tim Fogarty, Charlene
Henderson, Dennis Oswald, Larry Parker, Kenny Reynolds, Kay Stice, and Kristina Zvinakis. This paper has also
benefited from comments made by participants at the Brigham Young University, Case Western Reserve University,
and Louisiana State University accounting workshops, the Tenth Annual Financial Economics and Accounting
Conference, and the 2000 AAA Annual Meeting. The first author gratefully acknowledges the financial support of
King Fahd University of Petroleum and Minerals.
*Corresponding author: Phone: (801) 422-1768, Fax: (801) 422-0621, Email: ted_christensen@byu.edu

The relations among environmental disclosure, environmental performance, and economic


performance: A simultaneous equations approach
Abstract
This study provides an integrated analysis of the interrelations among (1) environmental
disclosure, (2) environmental performance, and (3) economic performance. Based on the argument that
managements (unobservable) overall strategy affects each of these corporate responsibilities, we
conjecture that prior literatures mixed results describing their interrelations may be attributable to the fact
that researchers have not considered these functions to be jointly determined. After endogenizing these
corporate functions in simultaneous equations models, we obtain results that suggest good
environmental performance is significantly associated with good economic performance, and also with
more extensive quantifiable environmental disclosures of specific pollution measures and occurrences.
Key Words: Environmental Performance, Environmental Disclosure, Simultaneous Equations Models

1. Introduction
As managers scramble to compete in the global economy, they must do so within societal
constraints characterized by ever-increasing environmental accountability. This accountability includes
heightened public scrutiny of both the firms environmental performance and its public disclosure of that
performance. These elements of corporate environmental accountability jointly impact the firms
profitability and the value of its common equity. This study provides an integrated analysis of how
managements overall strategy jointly affects (1) environmental disclosure, (2) environmental
performance, and (3) economic performance. Understanding these interrelations is of increasing interest
to both internal and external stakeholders in an era in which corporate environmental costs have become a
significant business expense.1
Prior empirical and social-responsibility research on the relations among environmental
performance, environmental disclosure, and economic performance has, in general, considered the
strength of pair-wise associations between two of these three factors, while not addressing the third.
Academic researchers from management, finance, and economic disciplines have focused on the
environmental-performanceeconomic-performance relation and the root question: Is going green good
for profits? Meanwhile, accounting researchers have concentrated on the adequacy of environmental
disclosure in financial reporting and its value relevance to investors: Do green disclosures adequately
represent the firms exposure to future green regulation? And because these disclosures are largely
voluntary, what factors determine their shade of green? While this research has advanced our knowledge
in specific settings,2 no study has attempted to examine environmental performance, environmental
disclosure, and economic performance within a single inclusive model.
We propose a holistic approach to examine collectively the relations among the firms (1)
environmental performance, (2) environmental disclosure, and (3) economic performance, using a
conceptual framework first suggested by Ullmann (1985). Ullmann presents a descriptive analysis of prior
social-responsibility studies that, in aggregate, report mixed empirical results of pair-wise associations
between environmental performance and economic performance, between environmental performance and

Whereas using a landfill to dump hazardous waste cost only $2.50 per ton in 1978, this charge rose to over $200 per
ton by 1987 (Buchholtz et al., 1992). Between 1972 and 1992, total annualized environmental protection costs for U.S.
firms tripled as a percentage of Gross Domestic Product (GDP). Senior executives anticipate this trend to continue
(Walley & Whitehead, 1994).

For example, Barth et al. (1997) examine the determinants of environmental disclosure for firms with Superfund
liabilities.

environmental disclosure, and between environmental disclosure and economic performance.3 Ullmann
posits that the inconsistent findings characteristic of these pair-wise studies reflect a common omitted
variablean inclusive management strategy. In executing the corporations strategic business plan,
management implements policies and initiates decisions that simultaneously affect the firms environmental
performance, environmental disclosure, and economic performance. If these corporate functions are
endogenously determined, then piecemeal Ordinary Least Squares (OLS) estimation of pair-wise relations
among these three functions will produce biased and inconsistent results.
While accepting Ullmanns premise that earlier research models used to explore these relations may
have been mis-specified, we consider incorporating an unobservable managerial strategy into an empirical
model to be problematic. Instead, we implement Ullmanns conceptual framework by explicitly treating
environmental performance, environmental disclosure, and economic performance as endogenous variables,
jointly determined by the firms strategic management process. In doing so, we advance the following
research questions: First, how are the firms environmental performance, environmental disclosure, and
economic performance interrelated after the endogeneity of these three corporate functions is explicitly
considered? Second, does joint estimation of these relations significantly differ from independent OLS
estimation? If so, significant methodological differences in estimating the coefficients of the endogenous
variables may be due to bias in the OLS estimator. Documentation of such bias has implications for both
interpreting prior research and planning future research designs.
To address these questions, we first specify environmental performance, environmental disclosure,
and economic performance in three multivariate equations in which at least one of these functions is an
explanatory variable of another. While our empirical proxies for economic performance are market-based
and our measure for environmental performance is a nonfinancial ratio based on the relative quantity of
hazardous waste recycled, we feel that it is important to qualify our measure of environmental disclosure
and distinguish it from its more generic connotation. Within the context of this study, environmental
disclosure is the disclosure of specific pollution measures and occurrences (toxic waste emissions, oil spills,
Superfund sites, etc.) that an investor might find useful in estimating future cash flows. This definitional
constraint focuses on the disclosure of cost drivers of future environmental costs and intentionally excludes
the greenwash commonly found in annual financial reports. Using a cross-sectional sample of 198 U.S.
Standard & Poors 500 firms, we first ensure that all sample firms exceed a minimum threshold for

Although Ullmann examined social-responsibility studies in general, approximately half (14 of 31) of these studies
focused on environmental concerns.

exposure to future environmental costs. We then compare independent OLS estimation of the relations
among the three corporate functions under investigation, with joint estimation using two-stage least squares
(2SLS) and three-stage least squares (3SLS) simultaneous equations models. After controlling for
endogeneity, we observe that good environmental performance is positively associated with good
economic performance, and also with more extensive quantifiable environmental disclosures of specific
pollution measures and occurrences.
This research contributes to our understanding of how societal concerns for the environment affect
corporate strategy and, ultimately, firm value. First, we recognize the endogeneity of the firms
environmental performance, environmental disclosure, and economic performance, and find that this
research-design consideration significantly affects the statistical significance of estimated interrelations.
Second, the significantly positive relation observed between environmental performance and economic
performance suggests that managers should change their strategic outlook regarding a firms environmental
performance, from fixating on the deadweight costs of ex post regulatory compliance, to focusing on the ex
ante opportunity costs represented by environmental pollution. Third, we find that good environmental
performers disclose (within the context of our definition of environmental disclosure) more pollution-related
environmental information than do poor performers, which is consistent with discretionary disclosure
theorys good news explanation. Fourth, while providing additional evidence regarding the determinants
of environmental performance, environmental disclosure, and economic performance, this research
introduces new empirical proxies for environmental performance and environmental disclosure. Finally, this
study spans the research agendas of multiple academic disciplines and contributes to a growing body of
interdisciplinary environmental knowledge.
The remainder of this study proceeds as follows: Section 2 reviews the pertinent literature and
frames the testable hypotheses; Section 3 introduces the structural equations in the simultaneous equations
models and describes the variables along with the data sources; Section 4 provides the empirical results; and
Section 5 summarizes the studys conclusions, implications, and limitations.

2. Literature review and hypotheses development


2.1. The relation between environmental performance and economic performance
Prior empirical research on the relation between environmental performance and economic
performance has reported mixed results. Bragdon & Marlin (1972) argued that pollution abatement and
profitability are compatible, and found a positive relation between profitability (earnings per share and

return on equity) and the Counsel on Economic Priorities (CEPs) environmental performance ratings for
pulp-and-paper firms.4 Spicer (1978) used firms in the pulp-and-paper industry to measure the association
between five firm-specific variablesprofitability, size, total risk, systematic risk, and the price-earnings
ratioand the CEPs pollution performance ratings. His results indicated that all signs were in the
directions hypothesized; however, only the correlation coefficients for size, systematic risk, and the priceearnings ratio were statistically significant. Although both of these studies suffered from relatively low
power due to small sample sizes and measurement error, their findings were consistent with the idea that
good environmental and economic performance are complements. Adherents to this concept of
complementary association believe that acting on a firms social responsibilities (or externalities) reduces
risk to which the capital markets are increasingly sensitive (Narver, 1971). Additionally, if environmental
pollution represents resources that have been inefficiently or incompletely used by the firm, the
elimination of such waste and inefficiencies benefits both the environment and the bottom line (Porter &
van der Linde, 1995a, 1995b).
Although these early empirical studies suggested a positive environmental-performance
economic-performance relation, later researchers have generally found the association to be statistically
insignificant. Rockness et al. (1986) examined hazardous waste disposal in the chemical industry using
environmental-performance data from a special site survey submitted to the U.S. Congress in 1979.
Testing the association among two waste disposal variables and 12 financial indicators representing
economic performance, Rockness et al. failed to document a statistically significant relation. Freedman &
Jaggi (1992) examined the long-term relation between environmental performance and economic
performance, using the percentage change in three pollution measures and various accounting ratios as
empirical proxies for environmental performance and economic performance, respectively. Again,
Freedman & Jaggis results failed to reject the null hypothesis of no significant association. Perhaps this
observed lack of significance resulted from a negative association between the variables of interest that
effectively countered any positive association suggested by earlier studies. An inverse relation between
environmental and economic performance is consistent with traditional economic thought that depicts this
relation as a tradeoff between the firms profitability and acting on its social responsibility (Friedman,

Early U.S. environmental studies have almost universally relied on environmental performance data compiled by the
Council on Economic Priorities (CEP), a nonprofit corporation organized in 1970. Its purpose was to foster socially
responsible business policies and practices. Environmental reports, of varying quality and depth, were produced by the
CEP between 1970 and 1977. Indices were formulated to measure the environmental performance of firms from four
highly polluting industries: steel, oil, electric utilities, and paper and pulp (Abbott & Monsen, 1979).

1962). In summary, the relation between environmental performance and economic performance is
founded on contradictory theoretical support that prior empirical research has failed to clarify.
2.2. The relation between environmental disclosure and environmental performance
Establishing a relation between environmental performance and environmental disclosure is
important from a social responsibility perspective in that a positive relation tends to validate the
credibility of the latter. However, empirical research on the environmental-disclosureenvironmentalperformance relation has generally found no significant association between the two. Ingram & Frazier
(1980) compared content analysis ratings of environmental disclosures that appeared in corporate annual
reports to CEP environmental-performance ratings. They did not find a significant association between
environmental disclosure and environmental performance. Freedman & Jaggi (1982) also reported
insignificant results using disclosures made in Forms 10-K. Using a different method to evaluate
environmental disclosures in annual reports, Wiseman (1982) again found no significant association
between environmental disclosure and environmental performance. Freedman & Wasley (1990) used
Wisemans method to evaluate environmental disclosures appearing in 10-Ks as well as annual reports.
Again they observed no significant association between environmental disclosure and environmental
performance as measured by CEP performance ratings.
In addition to these archival studies, Rockness (1985) conducted a field experiment in which
financial analysts, members of environmental protection organizations, environmental regulators, and
MBA students evaluated environmental disclosures contained in annual reports. Rockness, then compared
these subjects evaluations of environmental disclosures to CEP environmental-performance ratings, and
reported negative correlation coefficients, implying that subjects evaluate the worst environmental
performance as best, and vice versa. As a result, Rockness suggested that subjects might have been
misled by the disclosures. Li et al. (1997) arrived at a somewhat similar result in providing empirical
support for their game-theory model of environmental disclosure. Using a sample of Canadian firms, they
found a significantly positive relation between a firms decision to disclose and its propensity to pollute.
This implied a negative relation between environmental disclosure and environmental performance. More
recently, Hughes et al. (2001) observed that poorer U.S. environmental performers tended to make the
most disclosures, consistent with their responsibility to report contingent liabilities under SFAS 5.
However, although these disclosures differed between groups, these researchers found them not to be
useful in classifying the firms actual environmental performance.

A negative environmental-performanceenvironmental-disclosure relation appears to be


inconsistent with Verrecchias (1983) discretionary disclosure model.5 If we assume that good
environmental performance reduces the firms exposure to future environmental costs, then disclosure of
this information should be perceived as good news by investors. Therefore, firms with good
environmental performance should disclose more environmental information (in quantity and quality)
than should firms with poorer environmental performance. On the other hand, if greater disclosure
provides information that may be used in litigation against the disclosing firm (presumably by third
parties with political or social agendas), good environmental performers might elect to minimize such
disclosure (Li et al., 1997). A negative environmental-performanceenvironmental-disclosure relation is
also consistent with increased disclosure from poor environmental performers that strictly comply with
SFAS 5. In summary, prior research has not found a consistently significant association between
environmental performance and environmental disclosure.6
2.3. The relation between environmental disclosure and economic performance
Prior research on the environmental-disclosureeconomic-performance relation has used both
market-based and accounting-based measures of economic performance. Freedman & Jaggi (1982) tested
the association of their measurements of environmental disclosure against six accounting ratios used to
measure economic performance. They found insufficient statistical significance to reject the null
hypothesis of no association.7 However, Shane & Spicer (1983) used an event study design and
documented a negative market reaction during the two days preceding the release of CEP environmental
reports. Similarly, Stevens (1984) reported that a portfolio of firms that disclosed higher estimated future
pollution-abatement costs experienced monthly returns consistently lower than did a similar portfolio of
firms that disclosed lower estimates of future environmental costs.8
5

The lattitude afforded U.S. firms to make environmental disclosures under SFAS 5 (Accounting for Contingencies) led
researchers to classify such disclosures as largely voluntary (Barth et al., 1997).
6

We examine environmental disclosure as a function of environmental performance. Gray et al. (2001) examine
environmental disclosure as a function of turnover, capital employed, profit, and the number of employees. For their
sample of UK firms during an eight-year sample period, they were unable to document any unique and/or stable
relationship between any measure of disclosure and any corporate characteristic (Gray et al., 2001, p. 349). However,
their disclosure variable is significantly different from our disclosure metric.
7

Partitioning their sample by firm size into quartiles, Freedman & Jaggi observed a significantly negative correlation
between environmental disclosure and economic indicators for the top quartile.
8

Event studies have also established the informational relevance of significant environmental events to investors while
documenting their intra-industry effects. Bowen et al. (1983) examined the electric utility industry after the Three Mile
Island nuclear accident; Blacconiere & Patten (1994) examined the chemical industry in the wake of the Bhopal
chemical leak. Both studies documented a significantly negative intra-industry effect. Ironically, Patten & Nance
(1998) found a positive intra-industry effect following the 1989 grounding of the Exxon Valdez, as the spill triggered

More recently, Richardson et al. (2001) observed that social disclosure (which subsumes
environmental disclosure) behaved differently than general financial disclosure in tests of association with
the firms cost of capital. These researchers reported a significantly negative relation between the level of
financial disclosure and the cost of capital (consistent with prior research [Botosan, 1997]), an association
primarily driven by firms in less informationally rich environments. Conversely, Richardson et al. (2001)
found the relation between social disclosure and cost of capital to be significantly positive, with more
profitable firms being penalized more for their social disclosures. Assuming an inverse relation between
cost of capital and share price as suggested by the dividend discount model, Richardson et al.s findings
imply that increased social disclosure is associated with lower share prices. This evidence is not
consistent with the notion that discretionary disclosure reduces asymmetrical information costs or that
increased social disclosure triggers a significantly favorable investor preference effect. 9
2.4. Hypotheses
Prior empirical research examining pair-wise associations among environmental performance,
environmental disclosure, and economic performance has often been based on contradictory theoretical
support. Additionally, prior empirical studies have often drawn on relatively small samples because of the
limited availability of environmental performance information. All of the variables of interest are
measured with error, especially environmental performance and environmental disclosure. The resultant
low-powered tests have produced mixed results. Given the absence of unambiguous theoretical or
empirical support for predicting the interrelations among these three corporate functions, we test the
following nondirectional null hypotheses:
H1: Economic performance is not associated with environmental performance.
H2: Environmental disclosure is not associated with environmental performance.
H3: Economic performance is not associated with environmental disclosure.

substantial price increases in the wholesale and retail gasoline markets. Additionally, Blacconiere & Patten (1994)
observed that firms with more extensive environmental disclosures experienced less of a negative market reaction to
the Bhopal disaster.
9

An example of this effect is that as of 1997, some thirteen U.S. electric utilities had adopted some form of green
pricing under which the customer is asked to pay a premium of up to 15 percent of the normal bill. In return, the
utility acquires renewable energy sources according to a set formula. Additionally, surveys consistently reveal that
from 56 to 80 percent of respondents are willing to pay more for environmentally friendly energy sources
(Tietenberg, 1998).

3. The empirical model and sample selection


3.1. Managements Grand Strategy
Ullmann (1985) reviewed prior empirical studies that investigated the interrelations among social
performance, social disclosure, and economic performance. He noted that the ambiguous results reported
in aggregate by this body of research might be due to incomplete specification of the empirical models
measuring the statistical significance of pair-wise associations. Ullmann conjectured that the ubiquitous
omitted variable was managements grand strategy, and reasoned that the firms social performance,
social disclosure, and economic performance were jointly determined by this common missing element.
While recognizing that there have been several environmental studies examining one or more of these
constructs since 1985 (e.g., Richardson & Welker, 2001; Hughes et al., 2001; Hughes, 2000; Barth et al.,
1997), we believe that the problem described in Ullmanns meta-analysis nevertheless persists. This body
of empirical environmental research may have produced mixed results by failing to recognize the
potential for endogenous relations among these three constructs. We follow Ullmann in suggesting that
managements overall strategy affects economic performance, environmental performance, and
environmental disclosure. While we cannot directly represent a firms unobservable strategy, we can
accommodate the joint determination process by estimating the relations among these constructs using a
system of simultaneous equations defined in the following structural form:

Economic Performance = f (Environmental Performance and predetermined variables) (1.1)


Environmental Performance = f (Economic Performance and predetermined variables)

(1.2)

Environmental Disclosure = f (Environmental Performance and predetermined variables) (1.3)


3.2. The Empirical Model
Having defined the theoretical model, we propose the following structural equations as an empirical
model to test the studys hypotheses:

ECONPERF = 0 + 1 ENVPERF + 2 UE + 3 PREDISC + 4 GROWTH


+ 5 MARGIN + 6 ENVEXP + 1

(2.1)

ENVPERF = 0 + 1 ECONPERF + 2 PREDISC + 3 GROWTH + 4 ENVEXP


+ 5 ENVCON + 6 VISIBILTY + 2

(2.2)

ENVDISCL = 0 + 1 ENVPERF + 2 ENVEXP + 3 ENVCON + 4 SIZE + 3

(2.3)

We define the variables included in these models below.

3.3. Endogenous variables


Environmental Performance (ENVPERF) Prior research has measured environmental
performance in several ways.10 The most frequently used measure is the Council on Economic Priorities
(CEP) company rating charts, which are published quarterly. Corporate environmental performance
ranking provides insight into thirteen environmental issues that affect corporations. Although prior
researchers have used these ratings to measure corporate environmental performance, we elect not to use
this measure, for the following reasons: (1) the unavailability of the CEPs formulae to determine their
environmental-performance rating limits its interpretation; (2) weights assigned to different
environmental factors are not constant across industries, and we use an inter-industry, cross-sectional
sample; and (3) environmental reporting (disclosure) is one of the factors used to determine the CEP
rating of a corporations environmental performance.
In contrast to studies that rely on qualitative rankings to measure environmental performance, this
study employs a quantitative measure: the ratio of toxic waste recycled to total toxic waste generated
(ENVPERF). For example, if a firm introduces a pollution-abatement process, decreasing the total amount
of toxic waste generated, the denominator decreases and thus ENVPERF increases. Or if the firm adopts
processes that recycle toxic waste (such as closed-loop cooling systems), the numerator increases, again
increasing ENVPERF. Therefore as a rule, the higher the ratio of recycled waste to total waste, the better
the firms environmental performance. This environmental performance measure also incorporates the
first three principles of good environmental performance as promulgated by the Coalition for
Environmentally Responsible Economies (CERES): minimize pollutants, conserve resources, and reduce
waste. Also, this particular measure is sufficiently generic to be used by virtually all polluting industries,
avoiding the problem of relying on industry-specific pollution measures in our cross-sectional, interindustry, research design. We obtain recycling ratio data from the Corporate Environmental Profiles
Directory, which is published annually (since 1992) by the Investor Responsibility Research Center
(IRRC).11

10

See Ilinitch et al. (1998) for a discussion of current problems in measuring and reporting environmental performance
information.

11

The IRRC publishes various types of information on S&P 500 firms that are deemed to be useful to institutional
investors, corporations, and other users. There are three major sourcesgovernment agencies, corporations, and the
mediaof environmental information used by the IRRC. Much of this information was obtained by filing Freedom of
Information Act requests, often after extensive consultation with the numerous agencies involved (Corporate
Environmental Profiles Directory, 1995, p. 3).

Environmental Disclosure (ENVDISCL) Environmental disclosure measurement techniques can


be classified into two general groups. The first group includes measures that quantify the level of
environmental disclosure in the annual report, such as the number of pages (Gray et al., 1995; Patten,
1995; Guthrie & Parker, 1989; Patten, 1992), sentences (Wiseman, 1982; Ingram & Frazer, 1980), and
words (Deegan & Gordon, 1996; Zeghal & Ahmed, 1990). Each of these measures has its limitations.
While pages may include pictures that have no information on environmental or social activities,
sentences and words may ignore necessary graphs and tables. This form of measurement is also
susceptible to greenwashing, in which management puts its best spin on what otherwise might be a
lackluster environmental performance.
The second measurement technique uses a disclosure-scoring measure derived from content
analysis. Using this technique, researchers first identify certain environmental issues, then analyze the
environmental disclosure of each issue using a yes/no (or 1, 0) scoring methodology. After individual
issues are quantified, researchers determine the aggregate score for each firm.12
We adopt a similar disclosure-scoring methodology based on content analysis that incorporates
disclosures of four key environmental indicators: (1) the total amount of toxic waste generated and
transferred or recycled; (2) financial penalties resulting from violations of ten federal environmental laws;
(3) Potential Responsible Party (PRP) designation for the cleanup responsibility of hazardous-waste sites;
and (4) the occurrence of reported oil and chemical spills. Thus our environmental disclosure measure is
based on information reported in SEC Forms 10-K and focuses on pollution-related information in these
four areas. This informational restriction allows a structured evaluation while capturing significant
indicators of the firms environmental exposure to future environmental costs.
We believe that quantitative disclosures are more objective and informative to stakeholders than
qualitative information. Prior studies (e.g., Hughes et al., 2001) using quantitative disclosure measures
have assigned weights to different disclosure items based on the perceived importance of each item to
various user groups. Similarly, we assign the greatest weight (+3) to quantitative disclosures related to the
four environmental indicators described above. We assign the next highest weight (+2) to nonquantitative but specific information related to these indicators. Finally, general qualitative disclosures
receive the lowest weight (+1). Firms that do not disclose information for a given indicator receive a
score of zero for that indicator.

12

For example, Barth et al. (1997) used a variation of this scoring technique.

10

In constructing our disclosure measure, we realize that firms using production processes that are
not associated with one of our polluting activities should not be penalized for failing to make
environmental disclosures for that activity. We accommodate this adjustment by factoring the firms
participation in a polluting process (as reported to regulators rather than to shareholders) into the
denominator of our disclosure score. These data are obtained from the IRRC database (i.e., the firms
pollution data reported to the EPA or some other agency). For example, if a firm is designated a PRP but
does not disclose this information in its annual report, the numerator of the disclosure score would not be
affected (0), while the denominator of the score would be increased (+1), thereby decreasing the firms
overall disclosure score. This metric is the first environmental-disclosure measure, to our knowledge, that
attempts to capture the truth-telling or transparency property of the firms environmental disclosure by
measuring the firms disclosure to investors conditioned on its polluting activity reported to
environmental regulators.13 The total quality score (minimum = 0, maximum = +12) is summed for the
four activities and then scaled by the total number of polluting activities associated with the firms
production processes, the occurrence score (minimum = 0, maximum =+4). Thus environmentaldisclosure scores (ENVDISCL) range from 0 to +3. Figure 1 provides an illustrative example of an
environmental-disclosure score calculation.
[Insert Figure 1 about here]
Economic Performance (ECONPERF) Prior environmental studies have used both accountingbased and market-based measures to represent economic performance. For example, Bragdon & Marlin
(1972) used accounting-based measures (earnings per share and return on equity), while Spicer (1978)
used both accounting-based and market-based measures (profitability and the price-earnings ratio). One
limitation in using various economic performance metrics is that they tend to focus narrowly on one
aspect of a firms economic performance. Net income measures a firms profitability without considering
firm size. This limitation can be addressed by using measures such as return on assets (ROA), and scaling
profitability by the firms investment in their asset base. However, this measure may be biased if the
sample (such as this studys sample) includes firms from different industries with different industrydriven levels of fixed assets, and where there may be systematic differences across industries in the age of

13

Measuring environmental disclosure conditioned on the firms polluting activities as reported to the EPA is
consistent with the SEC and EPAs consideration of formalizing their currently informal exchange of information
programs (Slavich, 1994).

11

these assets. Given these limitations, and assuming (a semistrong form of) market efficiency, we elect to
use a market-based metric to represent economic performance.
We measure the firms economic performance using an industry-adjusted annual return. We
calculate this metric as the change in stock price during the year (adjusted for dividends), scaled by the
beginning-of-year stock price minus the industry median return (based on two-digit SIC codes). While
other market-derived measures, such as debt ratings and the cost of capital, may appear to be viable
candidates for representing economic performance, they are also associated with increased subjectivity
and measurement error. We believe that annual stock returns represent a more objective and
comprehensive measure of economic performance. The latter is due to the proposition that stock price
should impound information about the firms future prospects from a vast array of both financial and
nonfinancial measures, such as net income, ROA, operational data, etc. The annual industry-adjusted
stock return, ECONPERF, represents a comprehensive measure of the firms current-period economic
performance relative to other firms in the same industry.14 We complement this changes (return)
specification of ECONPERF in subsequent sensitivity testing in which a levels (share price)
specification is used to represent economic performance.
3.4. Predetermined variables
Unexpected Earnings (UE) Given our industry-adjusted-return measure of economic
performance, we control for the unexpected portion of earnings as the annual change in earnings per share
scaled by stock price at the beginning of the period (Christie, 1987). The association between returns and
earnings is well documented in the earnings-response-coefficient (ERC) literature (e.g., Collins &
Kothari, 1989).
Predisclosure Environment (PREDISC) A firms prior environmental disclosures may represent a
lower bound for current environmental performance. Investors expectations of environmental
performance are conditioned on information provided by prior environmental disclosures. If a firms
current environmental performance deteriorates (without disclosure) and reduces stock price, then
shareholders may have grounds for litigation. Also, managements reputation for providing credible
disclosures would suffer. We average ENVDISCL (the environmental-disclosure score) over the three
most recent years to proxy for past environmental disclosure (PREDISC), and we predict a positive
relation between PREDISC and ENVPERF.

14

Using industry-adjusted returns also permits us to hold the firms investment opportunity set (IOS) constant.

12

We also use PREDISC rather than ENVDISCL in examining the relation between environmental
disclosure and economic performance. This is necessary because our proxy for economic performance
annual industry-adjusted returnis measured at the end of the fiscal year, while the ENVDISCL variable
is derived from Forms 10-K financial disclosures that are released approximately three months later.
Therefore it is not possible to observe a contemporaneous relation between these variables. PREDISC
approximates the average level of disclosure in prior years of ENVDISCL.
Growth Opportunities (GROWTH) We use the ratio of market value of equity to book value of
equity as a proxy for future growth opportunities (Smith & Watts, 1992; Gaver & Gaver, 1993) in the
economic-performance equation. This ratio measures the difference between the markets appraisal of firm
value and the estimate of value aggregated from GAAP-mandated accounting transactions. For example,
U.S. firms conducting research and development (R&D) must expense this cost, whereas the market views
(at least some) R&D costs as an investment yielding future benefits. Growth opportunities should be
positively related to economic performance (ECONPERF). We also include GROWTH in the
environmental-performance equation as a proxy for intangible assets associated with innovation (Porter &
van der Linde, 1995a). We expect GROWTH to be positively related to environmental performance.
Profit Margin (MARGIN) Profit margin, the ratio of net income to net sales, captures both
profitability and the presence of competitive markets. Firms may obtain a higher profit margin by increasing
sales prices, decreasing costs, or doing both. In competitive markets, because firms have limited potential
for increasing prices, cost control becomes of primary importance. We assume that the relatively large firms
that comprise our sample operate in globally competitive markets. Therefore, higher profit margins signal
better cost control, and this indictor should be positively associated with economic performance
(ECONPERF).15
Environmental Exposure (ENVEXP) Environmental exposure is defined as the firms exposure to
future environmental costs. Since we predict that a firms environmental exposure will affect both
environmental performance and environmental disclosure, we use it as a control variable in the
environmental performance and environmental disclosure equations. In addition, environmental
performance and environmental disclosure may affect economic performance if a firm has a significant
level of exposure to environmental costs. Consequently we also include our environmental exposure
measure as a control variable in the economic performance equation.
15

However, because environmental issues drive some costs, we further isolate the profit-margin metric to capture the
efficiency of the firms cost control efforts, given a specific level of environmental exposure. To do this, we condition
profit margin on environmental exposure (ENVEXP).

13

Because the firms production processes determine environmental pollution, several researchers
have employed industry classification (SIC code) as a proxy for environmental exposure (i.e., Deegan &
Gordon, 1996; Niskala & Pretes, 1995; Little et al., 1995; Wiseman, 1982; Brockhoff, 1979). Given that
SIC codes may inadequately describe a firms unique portfolio of operations, we again use a quantitative
measure. We measure environmental exposure (ENVEXP) as the amount of toxic waste generated by the
firm scaled by total revenues.16 The amount of toxic waste generated per dollar of sales provides an
indication of the pollution intensity of the firms production processes, a measure we propose to be
positively correlated with future environmental costs.
We expect ENVEXP to be negatively related to economic performance, since future
environmental costs should reduce future cash flows and hence firm value. We posit that environmental
exposure is positively related to both environmental performance and environmental disclosure. Firms
with greater exposures to future costs have greater incentives to perform well environmentally in order to
assure stakeholders that their investments will not bear undue risk. Similarly, firms with greater ENVEXP
are likely to disclose more environmental information, both to fulfill the disclosure requirements of SFAS
5 and to reduce information asymmetry that adversely affects their cost of capital (Richardson & Welker,
2001).
Environmental Concern (ENVCON) Including the firms environmental concern as a predetermined
variable in the environmental performance and environmental disclosure equations is consistent with
Ullmanns (1985) conceptual emphasis on including managements strategy in models examining the firms
social responsibility. We operationalize this variable by using a factor analysis of three firm characteristics
that capture its concern for the environment, thereby extracting a single composite measure representing the
firms environmental concern (ENVCON).17 The first firm characteristic we consider, COMMITTEE, is an
indicator variable that is coded one (1) if the firm has a corporate environmental committee or department
charged with monitoring the environmental impact of the firms actions; otherwise it is coded as zero (0).
The second characteristic, REPORT, measures the frequency with which the firm publishes a stand-alone
environmental report (separate from the annual report). REPORT is coded 1.0 if the report is published
annually, 0.5 if the report is published biennially, 0.33 if the report is published triennially, and zero if no

16

We also use SIC codes in the sensitivity analysis.

17

Using factor analysis to construct the ENVCON variable is consistent with the concept of a latent variable that cannot
be adequately described by a single metric. Also, this methodology reduces the potential for encountering
multicollinearity problems among ENVCONs correlated component variables.

14

report is published. The third measure, PROGRAM, is a discrete variable that measures the number of EPA
voluntary programs in which the firm participates.18 Because managements decision to engage in these
three activities is completely voluntary, these variables provide evidence of managements awareness and
concern for the environment. We predict that ENVCON, the primary factor derived from factor analysis of
these variables, is positively related to both environmental performance and environmental disclosure.19
Public Visibility (VISIBLTY) Firms exposed to greater public scrutiny are more likely to incur
political costs associated with poor environmental performance. Consequently, we control for a firms
public visibility by including the number of Wall Street Journal news announcements about the firm during
the year (VISIBLTY) in the environmental-performance equation. We expect higher-visibility firms to have
higher standards of environmental performance because of increased public scrutiny.
Firm Size (SIZE) We use market value of common equity (SIZE) as a control variable for firm size
in the environmental-disclosure equation. Prior research (Atiase, 1985) has found that firm size proxies for
the firms information environment, where informationally rich environments are associated with larger
firms. Although we expect that larger firms have greater incentives to disclose environmental information,
our restrictive measure for environmental disclosure (specific pollution information) may distort the
measurement of this relation. Therefore, we do not predict the sign of the coefficient on the SIZE variable.
3.5. Sample selection and data collection
This study uses a cross-sectional research design and firm data for the year 1994. In order to be
included in our sample, a firm must

Be listed in the IRRCs 1994 Environmental Profiles Directory, which is limited to Standard and Poors
500 companies;

Generate at least one pound of toxic waste per $10,000 of revenue (in order to ensure some minimum
level of environmental exposure);

Have complete financial data reported in Compustat;

18

One example is the EPAs Green Lights program, in which firms voluntarily scrutinize every path of electrical
energy consumption. In return they receive EPA guidance on efficient lighting, heating, and cooling operations (Porter
& van der Linde, 1995a).

19

The eigenvalue for the first principle component (2.0351) is more than three times larger than that of the second
principal component (0.5256) and more than four times larger than that of the third principal component (0.4393).
Furthermore, the first principal component explains 67.8 percent of the variation of the three environmental concern
proxies. Finally, the communality estimates for the three environmental concern variables are REPORT 0.70,
PROGRAM 0.69, COMMITTEE 0.64 and the correlations between the first principle component and the three
environmental concern variables are as follows: REPORT 0.83, PROGRAM 0.83, COMMITTEE 0.80. Therefore,
we conclude that the first principle component captures the core construct common to these variables
managements environmental concern.

15

Have its annual reports accessable using the LexisNexis database; and

Appear in the Wall Street Journal Index.

Of the 531 firms included in the 1994 IRRC Environmental Profiles Directory, 313 do not have sufficient
environmental exposure to meet our second criterion. Four firms do not have complete data in the IRRC
Directory, and 16 firms do not have complete Compustat data. The final sample includes 198 firms that
meet all of the selection criteria.

4. Results
4.1. Descriptive statistics
Panel A of Table 1 provides descriptive statistics for the studys dependent variables. The mean
(median) industry-adjusted stock return, ECONPERF, for sample firms is 0.0076 (-0.0064). The mean
(median) percentage of waste recycled, ENVPERF, 74% (83%) implies that sample firms recycle most of
their generated waste. Finally, the mean (median) disclosure score, ENVDISCL, 0.67 (0.50) suggests that
on a scale of zero to three (where three represents quantitative disclosures of all significant environmental
activities), sample firms, on average, disclose only qualitative information at best.
[Insert Table 1 about here]
Panel B of Table 1 reports descriptive statistics for the predetermined variables used in our
system of equations. The environmental-disclosure score that represents the predisclosure environment
averaged over the three prior years, PREDISC, (0.47) is significantly less (p < 0.01) than the current
years (1994) environmental-disclosure score, ENVDISCL, (0.67).20 This result suggests that the higher
1994 environmental-disclosure level may have been triggered by the SECs release of Staff Accounting
Bulletin No. 92 in June 1993, and is also consistent with the findings of Barth et al. (1997).21
Environmental exposure, ENVEXP, is positively skewed as the mean, 9.95, and is higher than the 75th
percentile, 9.24. This suggests that, on average, sample firms generate approximately ten pounds of waste
for every one thousand dollars of sales generated. Because this variable is highly skewed, we use a logtransformation of ENVEXP in the empirical model.
20

Supplemental analysis reveals that, on average, the current level of environmental disclosure is 55% higher than the
average of the past three years.

21

The SEC signaled a continuing interest in improving the accounting for and disclosure of environmental liabilities
with the 1993 release of Staff Accounting Bulletin No. 92 (SAB 92). This bulletin (1) limited offsetting against
insurance consistent with GAAP, (2) limited the discounting of future environmental liabilities while imposing a
ceiling on the allowable discount rate, and (3) attempted to elicit more meaningful information concerning
environmental matters.

16

The firms environmental concern, ENVCON, is the primary factor from a factor analysis of three
different measures of managements environmental concern. Examining these three measures, we first
find that the frequency of separate environmental reports, REPORT, (0.26) implies that, on average,
sample firms publish a distinct environmental report approximately every fourth year. The mean
PROGRAM shows that the average sample firm voluntarily subscribes to 1.20 environmental EPA
programs. Finally, the mean and median COMMITTEE (0.62 and 1.00, respectively) suggest that more
than half of the sample firms have environmental committees charged with monitoring their
environmental responsibilities.
Panel B of Table 1 also reports that the financial determinants of a firms economic
performanceunexpected earnings (UE), the market-to-book ratio (GROWTH), and profit margin
(MARGIN)are all slightly positively skewed, which is consistent with prior research. The variables
representing public visibility (VISIBLTY) and firm size (SIZE) are also positively skewed, suggesting that
many of the samples S&P 500 firms with significant environmental exposure are among the largest and
most profitable public firms. Because VISIBLTY and SIZE are so highly skewed, we again employ logtransformations for these two variables in the empirical model.
Table 2 depicts both the parametric and non-parametric, pair-wise correlation coefficients for all
variables included in the system of equations. The three variables of interest (ECONPERF, ENVPERF,
and ENVDISCL) are all positively correlated, but the strengths of these pair-wise linear relations are
relatively weak (coefficients < 0.4). This observation is consistent with the mixed results experienced by
prior researchers in evaluating these pair-wise relations. Of note, the relation between the two
environmental disclosure variables, ENVDISCL and PREDISC approach perfect correlation, consistent
with the proposition that a firms disclosure policy is relatively sticky. As these variables do not appear
in the same structural equation, this high correlation does not present an econometric problem. Similarly,
the proxies for SIZE (market value of equity) and VISIBILITY (number of WSJ news announcements) are
highly correlated but again do not appear in the same structural equation. Positive correlations of medium
strength are noted between environmental performance (ENVPERF) and environmental exposure
(ENVEXP), MARGIN and SIZE, and between MARGIN and GROWTH. Other pair-wise relations depicted
in Table 2 are relatively weak. None of the depicted relations represent obvious anomalies to theoretical
explanation.
[Insert Table 2 about here]
4.2. The Endogeneity Problem

17

We posit that the mixed results of prior research may be attributable to the fact that managers
overall strategies likely affect economic performance, environmental performance, and environmental
disclosure simultaneously. As depicted in Table 2, our proxies for these constructs are all positively
correlated. We then examine the appropriateness of using an OLS regression analysis to estimate this
system of equations by employing a Hausman (1978) test. This statistical test should detect the presence
of any endogenous relations among our three dependent variablesECONPERF, ENVPERF, and
ENVDISCL.22 Using this procedure, we reject the null hypothesis of no endogeneity with respect to
ENVPERF in the third equation (t = 2.910, p < 0.004). We therefore conclude that OLS estimators are
potentially biased and inconsistent. After ensuring that each structural equation passes a White (1980)
test for homogeneity and correct specification, 23 we continue our analysis using two-stage least squares
(2SLS) and three-stage least squares (3SLS) simultaneous equation models in order to control for
endogeneity while obtaining asymptotically unbiased results. Because the results from the 2SLS and
3SLS models are largely similar, and because 3SLS parameter estimates are the more efficient of the two,
we report only 3SLS results. Our examination of this system using the 3SLS model incorporates all the
available information from all the equations in simultaneously estimating the parameters.
4.3. Regression Analysis (Three-Stage Least Squares)
The results of our 3SLS simultaneous equation model examining the relations among economic
performance, environmental performance, and environmental disclosure, as specified in structural
equations 2.1, 2.2, and 2.3, appear in Table 3. The coefficients for the explanatory variables in Equation
2.1, which specifies the determinants of economic performance, suggest a positive relation between
economic performance, ECONPERF, and environmental performance, ENVPERF. This positive relation
(p = 0.0739) is consistent with Porter and van der Linde's (1995a) win-win scenario and the proposition
that good environmental performance is rewarded in the market. This result is also consistent with
investors who view good environmental performance as an intangible asset. In further examining the
22

This particular Hausman test involves a two-stage procedure. In the first stage, each dependent variable is regressed
on all of the predetermined variables in the system, and predicted values for the dependent variable are calculated using
the estimated coefficients from the first stage regressions. In the second stage, each dependent variable is regressed on
the right-hand-side dependent variables, the predicted values of the right-hand-side dependent variables, and the
respective predetermined variables for that equation. The significance of each predicted right-hand-side dependent
variable is then tested against zero using a T-test or an F-test with the null hypothesis of no endogeneity with respect to
that variable. If a predicted dependent variable is determined to have significant explanatory power, the dependent
variable is presumed to be endogenous. See Kennedy (1994, p. 169) for an intuitive explanation of this procedure.
23

Whites (1980) test fails to reject the null hypothesis of homoskedasticity and correct model specification for all
equations at the 0.05 level. Furthermore, variance-inflation factors and collinearity diagnostics (Belsley, Kuh, &
Welsch, 1980) are well within acceptable ranges.

18

results of Equation 2.1, we find that both UE and GROWTH are significantly positively associated with
economic performance as predicted. We also find some evidence that MARGIN is positively associated
with ECONPERF, and that our proxy for environmental exposure (ENVEXP) is insignificant.
[Insert Table 3 about here]
The results presented in Table 3 for Equation 2.2 suggest that economic performance is not a
significant determinant of environmental performance. This result is not consistent with the economic
argument that profitability drives good environmental performance and that environmental accountability
is strictly a matter of affordability. Furthermore, the firms predisclosure environment (PREDISC) is
positively related to ENVPERF, consistent with the level of disclosure in the prior periods serving as a
lower bound for performance in the current period.24 In addition, the coefficients for both ENVEXP and
VISIBLTY are significantly positive, as predicted. This implies that firms with greater environmental
exposure and greater public visibility respond with higher environmental performance standards than
other comparable firms. Coefficients for variables representing GROWTH and environmental concern,
ENVCON, are statistically insignificant.
The 3SLS results for Equation 2.3 suggest that ENVPERF is significantly and positively
associated with ENVDISCL. This is consistent with discretionary disclosure theorys explanation that
good environmental performers believe that disclosure of their performance represents good news to
market participants. These firms can therefore be more forthright in disclosing indicators of
environmental pollution. The positive relation between environmental performance and environmental
disclosure is counter to that suggested by Li et al.s (1997) gaming model. Additionally, this result is
inconsistent with poor environmental performers that have potentially greater contingent environmental
liabilities, disclosing these contingent liabilities as required by SFAS 5. This implies that poor performers
either do not strictly follow the requirements of SFAS 5, or that SFAS 5s requirements provide sufficient
latitude (e.g., materiality judgments) for poor performers to justify nondisclosure. On the surface, it
appears inconsistent that good environmental performers would disclose more quantifiable environmental
information regarding their polluting activities, which the market would then use to punish them by
discounting their stock prices. However, such disclosure may be viewed as a signal that the firm is in fact

24

Because of the high correlation between PREDISC and ENVDISCL as depicted in Table 2, an alternative explanation
for this result is that the predisclosure environment variable is a proxy for contemporaneous environmental disclosure.
If we substitute ENVDISCL for PREDISC in equation 2.2, we observe similar results to those reported in Table 3. We
acknowledge the research designs inability to disentangle these variables with regard to equation 2.2. Having said this,
we elect to retain PREDISC, rather than ENVDISCL, as a determinant of environmental performance because we
believe the theoretical support for PREDISCs inclusion to be more persuasive.

19

a good environmental performer, and may be used by the market to help differentiate between the good
and the not-so-good. We also find marginal evidence that managements level of environmental concern,
ENVCON, is positively related to environmental disclosure. This suggests that managers who are
concerned about the environment are more likely to disclose their environmental activities publicly.
In sum, the 3SLS results suggest two significant relations among our dependent variables. First,
environmental performance is positively related to economic performance, suggesting that the market
rewards firms with higher levels of environmental performance. Second, environmental performance is
positively related to environmental disclosure, suggesting that good environmental performers are more
forthright and disclose more with respect to quantifiable pollution information. We observe this last
relation to be significant only after controlling for endogeneity (3SLS) and to be statistically insignificant
using OLS estimation (p = 0.37). This contrast in results addresses one of our research questions by
providing evidence of the importance for controlling for endogeneity in this research setting, and
validates our adoption of a joint-estimation research design.
4.4. Sensitivity analysis
4.4.1. Model specification using stock price as a proxy for economic performance
In specifying our system of equations, we elected to use annual industry-adjusted stock return as
our dependent variable representing economic performance. While this decision is justifiable, assuming
efficient markets, researchers have often preferred to use a valuation approach by measuring the
economic performance construct using market share price. We therefore provide a robustness test of our
model using market price instead of annual industry-adjusted returns in Equation 2.1. We elect to make
two minor changes in the control variables in order to reflect the change from returns to market price as a
proxy for economic performance. First, since this new proxy for economic performance measures the
level of performance as opposed to the change in performance, we substitute book value of common
equity, BOOKVAL, for UE in Equation 2.1. This acknowledges the theoretical linkage between market
value and book value of equity, on which accounting valuation researchers have heavily focused (e.g.,
Barth & McNichols, 1994; Hughes, 2000) in attempting to measure environmental liabilities. We also add
operating income, OPINC, which is intended to capture the present value of expected future abnormal
earnings, as per Ohlson (1995). Finally, we substitute net sales for market value of equity control variable
for SIZE, since we could not include the same variable as both an endogenous and predetermined variable
in the same system of equations. These are the only changes incorporated in the respecified system of
equations.

20

Table 4 presents results for the respecified system of equations using stock price to represent
economic performance. The results are consistent with those observed using annual stock return as our
economic performance proxy. In Equation 1, we observe a significantly positive relation between
environmental performance and economic performance, providing some assurance for inferences made
based on weaker statistical results in our original returns-specified model. All other explanatory variables
are significant and correctly signed, with two exceptions: our operating income variable (OPINC) is
insignificant, and the coefficient on the variable representing the firms predisclosure environment is
significantly negative. Because the latter variable was insignificant in our original returns model, we
make no inferences regarding the ECONPERF PREDISC relation.
[Insert Table 4 about here]
In Equation 2, we observe results identical to those presented in our main analysis, except that the
coefficient on VISIBLTY is no longer statistically significant. Finally, the results for Equation 3 are very
similar to those presented in Table 3, with one exception. While we still observe a highly significantly
positive relation between ENVPERF and ENVDISCL, the coefficient on ENVCON is no longer
statistically significant. In sum, the results of the respecified system of equations with regard to our
variables of interest are similar, regardless of whether the economic performance variable is specified in a
levels (share price) or in a changes (returns) format. This provides some assurance that our primary
results are quite robust to economic performance measurement.
4.4.2. Industry effects
The studys sample is composed of firms from 31 two-digit SIC codes. Given this sample size, it
would be very inefficient to include an indicator variable for every industry to completely control for all
industry differences. However, we isolate six two-digit SIC codes containing at least 14 firms each and
comprising a total of 117 firms (SIC codes 26, 28, 35, 36, 37, and 38). The remaining 40% of our firms
are distributed broadly throughout the other 25 two-digit SIC codes represented in our sample. Repeating
our analysis, including indicator variables to control for differences across industries, yields virtually
identical results. Only one of the industry control variables is significant in Equation 2.1, while none is
significant in the other two equations. This analysis suggests that there may be systematic differences in
economic performance across industries, but that there are no systematic differences in environmental
performance or environmental disclosure related to industry-specific firm characteristics. This result may
also be driven by our selection of a broad-based, generic metric for environmental performance.
4.4.3. Changes in environmental disclosure

21

To further explore the environmental-performanceenvironmental-disclosure relation, we note that


the SEC actively focused on increasing corporate environmental disclosure during the sample period (see
note 21). The effect of this increased regulatory interest on environmental disclosure is noted in Table 1, as
our measure for environmental disclosure significantly increased (p < 0.01) between the prior periods
represented by PREDISC (the disclosure score averaged over the 1991, 1992, and 1993 period) and the
current period in which ENVDISCL is measured (1994). If the level of ENVDISCL of good performers is
greater than that of poor performers for the current period, as the results suggest, then we assume that the
same conditions existed in the prior period.
If good performers disclose more than poor performers do, then we believe that the increase in
environmental disclosure depicted in Table 1 must have been predominantly made by good environmental
performers. We test this proposition by ranking firms by their environmental performance and measuring
the pair-wise correlation between their rankings and the corresponding changes in environmental disclosure
(ENVDISCL PREDISC). The correlation coefficient is significantly positive in both parametric (0.1985, p
< 0.005) and nonparametric (0.2262, p < 0.001) tests. This result is consistent with good performers, on
average, increasing their 1994 environmental disclosure levels over their average disclosure levels for the
prior three years. If the increased SEC oversight of environmental disclosures during this period was
intended to increase disclosures from poor environmental performers, these results suggest that it was not
very effective.

5. Conclusions, limitations, and implications


This study investigates the relations among economic performance, environmental performance,
and environmental disclosure, after explicitly considering that these three corporate functions are jointly
determined. This specification is consistent with Ullmanns (1985) argument that the execution of each of
these corporate responsibilities is determined by managements (unobservable) overall strategy. We, like
Ullmann, conjecture that the mixed results reported by prior environmental empirical research may have
arisen because researchers did not allow for these constructs to be endogeneous. By explicitly controlling for
endogeneity in the studys research design, this research contributes to our understanding of how societal
concerns for the environment affect corporate strategy and, ultimately, firm value. A more detailed
description of how this study contributes to the current stream of environmental research follows.

22

First, we find that allowing for the potential endogeneity associated with specifying our three
corporate functions economic performance, environmental performance, and environmental disclosure
makes a statistically significant difference in estimating their interrelations. Finding our proxy for
environmental performance to be endogeneous, we provide evidence of the bias associated with OLS
estimation under such conditions by using a system of simultaneous equations. The OLS results suggest
that only the economic-performanceenvironmental-performance relation of the potential interrelations
among economic performance, environmental performance, and environmental disclosure is statistically
significant in our cross-sectional sample. However, by using a joint-estimation research design, we also
observe a significantly positive relation between good environmental performance and more extensive
quantifiable disclosure of environmental information. The contrast between independently estimated OLS
results and those obtained through joint determination highlight the importance of controlling for
endogeneity in the research design.
Second, the significantly positive relation observed between environmental performance and
economic performance is consistent with Michael Porters theoretical argument that innovative solutions
to reduce the inefficiencies associated with pollution promote both environmentalism and industrial
competitiveness simultaneously. Porter & van der Linde (1995a, 1995b) reject the economic-ecological
tradeoff paradigm because it assumes that everything except regulation (i.e., technology, products,
processes, and customer needs) is fixed.25 They argue that environmental pollution represents resources
that have been used incompletely, inefficiently, or ineffectively. Our results, consistent with this
argument, suggest that managers should change their strategic outlook regarding a firms environmental
performance, from fixating on the deadweight costs of ex post regulatory compliance to focusing on the
ex ante opportunity costs represented by environmental pollution.26

25

Porter & van der Linde (1995a) cite the false tradeoff between quality and cost as a similar misconception,
induced by the static manner in which the relation is framed.
26

This result is also consistent with a recent report (MCA, 2000) released by the Management Consultancies
Association that examines the role of business in environmental issues. The report describes a triple bottom line
approach that benefits those firms that adopt proactive environmental strategies. First, these firms see competitive
advantage in attaining environmental regulations that tend to crowd out competitors that are accustomed to less
stringent regulation. Second, these firms have exploited alternative technologies to fit in with societys desire for a

23

Our finding that good environmental performance and economic profitability go hand-in-hand, in
addition to supporting Porters theoretical advocacy of this relation, is also consistent with the view that
economic performance and environmental performance are both related to the quality of management.
Good managers, acting in the firms long-term interest, accept the firms social responsibility and adopt
pro-active strategies for controlling environmental pollution. Finally, because we use market-based
proxies to represent economic performance, the observed positive economic-performanceenvironmentalperformance relation is also consistent with investors preferences for equities of environmentally
responsible firms. Socially responsible investing is becoming more popular, with over $1.5 trillion
worldwide currently invested according to social or ethical criteria (Vogel, 2002).27
Third, we find that good environmental performers disclose (within the context of our definition
of environmental disclosure) more pollution-related environmental information than do poor performers.
This finding is consistent with discretionary disclosure theorys good news explanation. This result is
also consistent with firms using voluntary disclosure to project a proactive environmental image by
providing candid information regarding their environmental performance, even though that information
may be viewed as negative on a situational basis. This disclosure policy appears to be at odds with
strategies that minimize environmental disclosures because market participants may perceive such
information as bad news. These results suggest that firms with records of good environmental
performance can be more forthright in disclosing that performance. The study also documents a positive
relation between past environmental disclosure and current environmental performance. This association
is consistent with the notion that prior disclosure establishes a lower bound for managements

clean environment. Finally, these firms have accepted the responsibility to minimize and, they hope, neutralize the
negative impacts of their polluting activities (MCA, 2000, p. 56-57).
27

Good corporate social responsibility does not neccesssarily carry-over to good accounting practices, as
evidenced by the scandals appearing in todays business press. Infamous Enron lobbied the Bush administration to
accept the Kyoto Protocol on global warming, no doubt with the expectation of profiting from trading in a market for
carbon dioxide emissions. Merck, recently cited for misrepresenting revenues, received the prestegious Business
Enterprise Trust award in 1991 for developing and distributing Mectizan, a drug effective against river blindness,
which treatens millions of the Third Worlds poor. And while Xerox has been lauded as an international leader in
enviro-management for its program of recycling copy cartridges, the firm recently paid a $10 million fine to settle a
civil suit filed by the U.S. SEC for overstating profits (Vogel, 2002).

24

environmental performance. Not achieving this lower bound might adversely challenge the expectations
of market participants, and potentially trigger shareholder litigation.
Fourth, this research introduces new empirical proxies for environmental performance and
environmental disclosure. In contrast to studies that rely on qualitative rankings to measure environmental
performance, this study adopts a quantitative measure: the ratio of toxic waste recycled to total toxic
waste generated. Whereas this measure may have certain limitations as discussed below, this ratio also is
sufficiently general to be a useful environmental performance measure across industries a property that
is essential in an inter-industry, cross-sectional research design, such as ours. This recycling ratio measure
might be viewed as a summary statistic, much like the earnings number. We also construct a new
measurement of environmental disclosure reported to investors that is uniquely preconditioned on the
firms polluting activities as reported to regulators. This disclosure metric not only controls for the degree
of disclosure made by firms with limited polluting activities, but also extracts a transparency dimension
for polluters that file mandated environmental information with regulators, yet do not disclose this
information in financial reports.
Finally, this study spans the research agendas of multiple academic disciplines and contributes to
a growing body of interdisciplinary environmental knowledge. In motivating our research design, we call
upon Ullmanns (1985) meta-analysis of empirical studies that investigate the interrelations among social
performance, social disclosure, and economic performance, which was published in the Academy of
Management Review. Our results are also consistent with management guru Michael Porters win-win
argument regarding the positive relation between environmental and economic performance, which is
widely cited in both management and economic literature. The market-based proxies used to represent the
firms economic performance are common to both accounting and finance research. While environmental
research questions may extend into the domains of several academic disciplines, researchers are reluctant
to violate these academic boundaries. However, without such interdisciplinary trespassing, a holistic
approach to investigating these interdisciplinary interrelations of interest would not be possible.

25

Like all cross-sectional studies, limitations to interpreting our results apply regarding whether the
time period examined is representative and the observed relations among the variables of interest are
relatively stable over time. We know of no external event limiting 1994 as a sample period, and believe
two of our three dependent variables environmental performance and environmental disclosure do
not change dramatically around this temporal datum. The stability of economic performance is more
problematic. We address this limitation by using two specifications for this variable: a changes
specification (industry-adjusted returns) and a levels specification (share price).
The cross-sectional design presents another limitation in our choice of a suitable proxy for
environmental performance. Because pollution is determined by the production process, pollution-related
measures of environmental performance tend to be industry-specific. For example, measures of air
pollution (e.g., sulfur dioxide emissions) may be a relevant performance measure for the electric utility
industry (Hughes, 2000), whereas measures of water pollution may be more relevant in measuring the
environmental performance of firms in the pulp-and-paper industry (Cormier & Magnan, 1997). Because
our measure of environmental performance (the ratio of toxic waste recycled to total toxic waste
generated) is one of the few metrics suitable for inter-industry comparisons (National Academy of
Engineering, 1999), it is probably less representative of environmental performance for some firms than
industry-specific measures. Additionally, our measure for environmental performance does not consider
the relative toxicity of the waste being recycled, and aggregates all waste into one medium (i.e., air
pollution is combined with water pollution). Although this summary statistic (recycling ratio) is suitable
for inter-industry comparisons, it likely to be noisy relative to industry-specific metrics.
As explained above, one of the primary challenges in conducting this research was measuring
each of the three dependent variables. Whereas we used two measures of economic performance and a
recycling ratio common across industries for our measure of environmental performance, our choice of a
measure for environmental disclosure was, by its very nature, subjective. Although we restrict our
definition of environmental disclosure to include only specific pollution-related environmental measures,
and clearly highlight this restriction throughout the discussion related to variable selection, our method of

26

scoring disclosure quality retains a subjective element.28 As a final limitation, we recognize that our
sample, drawn from S&P 500 firms, induces a size bias. Whereas our results may be generalized for
large firms, inferring that small firms may behave similarly is overreaching.
Although we acknowledge these limitations, we also believe that we have used those econometric
tests most relevant in assuring that our models of simultaneous equations are correctly specified.
Assuming correct specification, the simultaneous-equation research design provides a significant
improvement in estimating the relations among environmental performance, environmental disclosure,
and economic performance over that obtained by independently estimated OLS models. We conclude that
the simultaneous-equation approach used in this study provides a more coherent explanation regarding the
relations among environmental disclosure, environmental performance, and economic performance than
do those reported by prior studies using pair-wise tests of association. Further research might incorporate
different variables for these constructs over different sample periods. As the world becomes more
environmentally conscious (e.g., the Kyoto Protocol on climate change), additional examination of the
relations among economic performance, environmental performance, and environmental disclosure is
increasingly warranted.
The studys primary results that good environmental performance is associated with good
economic performance and also with more forthcoming and factual environmental disclosure should be
good news for those questioning the compatibility of corporate social responsibility and economic
profitability. Non-financial measures of environmental performance, such as the recycling ratio presented
in this study, may also be leading indicators of future financial performance. These measures therefore
may be suitable candidates for incorporation in the firms balanced scorecard used to evaluate
managerial and firm performance. Managers evaluated in this manner should be increasingly proactive in
introducing new processes that improve both production efficiency and environmental sustainability.

28

Our measure of environmental disclosure appears to be consistent with information sought by philanthropic
foundations and investment managers who recently called upon the SEC to enforce regulations requiring firms to more
fully disclose environmental liabilities. These investor groups appealed to the SEC that hidden environmental costs
threaten their portfolios similar to other corporate accounting tricks. SEC guidelines require publicly held companies
to disclose any material events and specifically require companies to disclose legal proceding that might result in
sanctions of $100,000 or more (Bank, 2002).

27

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31

TABLE 1
Descriptive Statistics
Cross-Sectional Data for 198 Environmentally Exposed Firms
Standard
Deviation

25th
Percentile

Median

75th
Percentile

0.0076

0.3227

-0.1166

-0.0064

0.1091

ENVPERF

0.74

0.23

0.62

0.83

0.93

ENVDISCL

0.67

0.66

0.00

0.50

1.00

Variables
Mean
Panel A: Dependent Variables
ECONPERF

Panel B: Predetermined Variables


PREDISC

0.47

0.54

0.00

0.17

0.67

ENVEXP

9.95

24.61

0.53

2.06

9.24

ENVCON

0.01

1.00

-1.19

-0.02

0.86

REPORT

0.26

0.41

0.00

0.00

0.50

PROGRAM

1.20

1.12

0.00

1.00

2.00

COMMITTEE

0.62

0.49

0.00

1.00

1.00

0.0112

0.0461

0.0022

0.0092

0.0220

GROWTH

2.66

1.69

1.69

2.25

3.08

MARGIN

0.07

0.19

0.003

0.02

0.09

VISIBLTY

26.58

34.27

11.00

16.00

27.00

8,534.31

13,568.52

1,781.56

3,374.25

7,842.94

UE

SIZE
ECONPERF
ENVPERF
ENVDISCL
PREDISC
ENVEXP
ENVCON

=
=
=
=
=
=

REPORT

PROGRAM
=
COMMITTEE =
=
UE
MARGIN
=
GROWTH
=
VISIBLTY
=
SIZE
=

Industry-adjusted annual stock return.


Environmental performance measured as the percentage of total waste generated that is recycled.
Environmental disclosure score obtained from content analysis of the firm's annual report.
Past environmental disclosure measured as the average ENVDISCL over the preceding three years.
Environmental exposure measured as toxic waste generated scaled by total revenues.
Environmental concern measured as the primary factor obtained from factor analysis of
REPORT, PROGRAM, AND COMMITTEE.
Indicator Variable coded one if the firm publishes an annual environmental report separate from its
annual report, 0.5 if the report is biennial, 0.33 if the report is triennial, and 0 if no report is published.
The number of voluntary EPA programs in which the firm participates.
Indicator variable coded one if the firm has an environmental committee and zero otherwise.
Unexpected earnings measured as the annual change in earnings per share scaled by beginning of year
stock price.
Profit margin (net income / net sales).
Market-to-book ratio of common equity.
The number of Wall Street Journal news announcements about the firm.
Market value of common equity (in thousands).

32

TABLE 2
Correlation Coefficients (p-values) for All Variables Included in the Simultaneous Equation Model
Pearson Coefficients in Upper Right and Spearman Coefficients in Lower Left
ECONPERF ENVPERF ENVDISCL PREDISC ENVEXP

ENVCON

UE

GROWTH MARGIN

VISIBLTY

SIZE

1.0000

0.3166
(0.0001)

0.2196
(0.0010)

0.1868
(0.0052)

0.2401
(0.0003)

0.2392
(0.0003)

0.4550
(0.0001)

0.3658
(0.0001)

0.4132
(0.0001)

0.2290
(0.0006)

0.2789
(0.0001)

ENVPERF

0.1850
(0.0057)

1.0000

0.3418
(0.0001)

0.2965
(0.0001)

0.5402
(0.0001)

0.3897
(0.0001)

0.1983
(0.0030)

0.1571
(0.0192)

0.3874
(0.0001)

0.3476
(0.0001)

0.4259
(0.0001)

ENVDISCL

0.1771
(0.0082)

0.3264
(0.0001)

1.0000

0.9861
(0.0001)

0.3909
(0.0001)

0.4589
(0.0001)

0.1915
(0.0042)

0.0128
(0.8494)

0.0853
(0.2054)

0.2209
(0.0009)

0.2483
(0.0002)

PREDISC

0.1771
(0.0082)

0.3264
(0.0001)

1.0000
(0.0001)

1.0000

0.3444
(0.0001)

0.4285
(0.0001)

0.1649
(0.0139)

-0.0003
(0.9970)

0.0720
(0.2857)

0.1794
(0.0074)

0.2098
(0.0017)

ENVEXP

0.1879
(0.0050)

0.4990
(0.0001)

0.4399
(0.0001)

0.4399
(0.0001)

1.0000

0.2525
(0.0001)

0.3081
(0.0001)

0.0678
(0.3146)

0.2941
(0.0001)

0.0577
(0.3926)

0.2261
(0.0007)

ENVCON

0.2283
(0.0006)

0.3870
(0.0001)

0.5063
(0.0001)

0.5063
(0.0001)

0.3276
(0.0001)

1.0000

0.1384
(0.0394)

0.0381
(0.5720)

0.1494
(0.0260)

0.5256
(0.0001)

0.5263
(0.0001)

UE

0.2592
(0.0001)

0.0831
(0.2175)

0.1606
(0.0166)

0.1606
(0.0166)

0.2833
(0.0001)

0.1278
(0.0573)

1.0000

0.04476
(0.4801)

0.2139
(0.0013)

0.0616
(0.3607)

0.0491
(0.4665)

GROWTH

0.3426
(0.0001)

0.2028
(0.0024)

0.0863
(0.2004)

0.0863
(0.2004)

0.1734
(0.0096)

0.2033
(0.0023)

-0.0450
(0.5051)

1.0000

0.5535
(0.0001)

0.2860
(0.0001)

0.4735
(0.0001)

MARGIN

0.2502
(0.0002)

0.1824
(0.0064)

0.0152
(0.8218)

0.0152
(0.8218)

0.1827
(0.0063)

0.1892
(0.0047)

0.0329
(0.6259)

0.6243
(0.0001)

1.0000

0.4079
(0.0001)

0.5570
(0.0001)

VISIBLTY

0.1944
(0.0036)

0.2738
(0.0001)

0.2993
(0.0001)

0.2993
(0.0001)

0.1252
(0.0627)

0.5935
(0.0001)

0.0117
(0.8622)

0.3491
(0.0001)

0.3090
(0.0001)

1.0000

0.8258
(0.0001)

SIZE

0.2184
(0.0011)

0.3340
(0.0001)

0.2794
(0.0001)

0.2794
(0.0001)

0.2351
(0.0004)

0.5655
(0.0001)

-0.0349
(0.6051)

0.5434
(0.0001)

0.5173
(0.0001)

0.8039
(0.0001)

1.0000

ECONPERF

33

TABLE 2 Continued
ECONPERF = Industry-adjusted annual stock return.
ENVPERF

= Environmental performance measured as the percentage of total waste generated that is recycled.

ENVDISCL

= Environmental disclosure score obtained from content analysis of the firm's annual report.

PREDISC

= Past environmental disclosure measured as the average ENVDISCL over the preceding three years.

ENVEXP

= Environmental exposure measured as toxic waste generated scaled by total revenues.

ENVCON

= Environmental concern measured as the primary factor obtained from factor analysis of REPORT, PROGRAM, AND COMMITTEE.

MARGIN

= Profit margin (net income / net sales).

GROWTH

= Market-to-book ratio of common equity.

VISIBLTY

= The number of Wall Street Journal news announcements about the firm.

SIZE

= Market value of common equity (in thousands).

34

TABLE 3
Three-Stage Least Squares Regression Results
(Economic Performance = Industry-adjusted Returns)
Coefficients (t-statistics)

Independent
Variable
INTERCEPT

Predicted
Sign

ECONPERF
(Equation 1)
-0.44***
(-3.24)

ECONPERF
ENVPERF
UE

PREDISC

GROWTH

MARGIN

ENVEXP

-/+/+

ENVCON

VISIBLTY

0.40*
(1.80)
2.42***
(6.53)
-0.01
(-0.22)
0.05***
(3.47)
0.01*
(1.54)
-0.02
(-1.24)

Dependent Variable
ENVPERF
(Equation 2)
0.37***
(6.05)
0.04
(0.42)

2.70***
(3.01)

0.26***
(10.44)
0.01
(0.78)

0.06***
(6.27)
0.01
(0.35)
0.06***
(3.17)

SIZE
System Weighted R2

0.5483

ENVDISCL
(Equation 3)
-0.32
(-0.81)

0.5483

-0.09
(-1.31)
0.10*
(1.39)

-0.11*
(-1.86)
0.5483

* statistically significant at the 0.10 level (one-tailed test if the sign is predicted, otherwise two-tailed).
** statistically significant at the 0.05 level (one-tailed test if the sign is predicted, otherwise two-tailed).
*** statistically significant at the 0.01 level (one-tailed test if the sign is predicted, otherwise two-tailed).
ECONPERF
= Industry-adjusted annual stock return.
ENVPERF
= Environmental performance measured as the percentage of total waste generated that is recycled.
ENVDISCL
= Environmental disclosure score obtained from content analysis of the firm's annual report.
UE
= Annual change in earnings per share scaled by stock price at fiscal year end.
PREDISC
= Past environmental disclosure measured as the average ENVDISCL over the preceding three years.
GROWTH
= Market-to-book ratio of common equity.
= Environmental exposure measured as the natural log of toxic waste generated scaled by total
ENVEXP
revenues.
ENVCON
= Environmental concern measured as the primary factor obtained from factor analysis of
REPORT, PROGRAM, and COMMITTEE.
REPORT
= Indicator Variable coded one if the firm publishes an annual environmental report separate from its
annual report, 0.5 if the report is biennial, 0.33 if the report is triennial, and 0 if no report is
published.
PROGRAM
= The number of voluntary EPA programs in which the firm participates.
COMMITTEE
= Indicator variable coded one if the firm has an environmental committee and zero otherwise.
MARGIN
= Profit margin (net income / net sales) conditioned on environmental exposure.
VISIBLTY
= The natural log of the number of Wall Street Journal news announcements about the firm.
SIZE
= The natural log of market value of common equity.

35

TABLE 4
Three-Stage Least Squares Regression Results
(Economic Performance = Market price per share)
Coefficients (t-statistics)

Independent
Variable
INTERCEPT

Predicted
Sign

ECONPERF
(Equation 1)
-103.79***
(-6.44)

ECONPERF
ENVPERF
BOOKVAL

OPINC

PREDISC

GROWTH

MARGIN

ENVEXP

-/+/+

ENVCON

VISIBLTY

135.07***
(6.49)
1.51***
(15.91)
5.78
(0.58)
-14.12
(-7.41)
9.23***
(10.25)
0.30**
(1.99)
-4.64***
(-4.01)

Dependent variable
ENVPERF
(Equation 2)
0.58***
(10.94)
0.00
(0.48)

5.72**
(2.53)

0.22***
(11.44)
-0.00
(-0.12)

0.03***
(3.51)
-0.00
(-0.39)
0.01
(0.87)

SIZE
System Weighted R2

0.4968

ENVDISCL
(Equation 3)
-2.95***
(-2.65)

0.4968

-0.17
(-1.49)
0.03
(0.39)

-0.06
(-0.79)
0.4968

* statistically significant at the 0.10 level (one-tailed test if the sign is predicted, otherwise two-tailed).
** statistically significant at the 0.05 level (one-tailed test if the sign is predicted, otherwise two-tailed).
*** statistically significant at the 0.01 level (one-tailed test if the sign is predicted, otherwise two-tailed).
ECONPERF
= Market stock price per share.
ENVPERF
= Environmental performance measured as the percentage of total waste generated that is recycled.
ENVDISCL
= Environmental-disclosure score obtained from content analysis of the firm's annual report.
BOOKVAL
= Book value of common equity per share.
OPINC
= Operating income per share.
PREDISC
= Past environmental disclosure measured as the average ENVDISCL over the preceding three years.
GROWTH
= Market-to-book ratio of common equity.
ENVEXP
= Environmental exposure the natural log of toxic waste generated scaled by total revenues.
ENVCON
= Environmental concern measured as the primary factor obtained from factor analysis of
REPORT, PROGRAM, and COMMITTEE.
REPORT
= Indicator variable coded 1.0 if the firm publishes an annual environmental report separate from its
annual report, 0.5 if the report is biennial, 0.33 if the report is triennial, and 0 otherwise.
PROGRAM
= The number of voluntary EPA programs in which the firm participates.
COMMITTEE
= Indicator variable coded one if the firm has an environmental committee and zero otherwise.
MARGIN
= Profit margin (net income / net sales) conditioned on environmental exposure.
VISIBLTY
= The natural log of the number of Wall Street Journal news announcements about the firm.
SIZE
= The natural log of net sales.

36

Figure 1
Example of disclosure scoring technique
ENVDISCL = Quality score / Occurrence score
Environmental
Activity

Occurrence

Quality of Disclosure

Yes/No

Score

Type

Score

PRP Designation

Yes

Quantitative

Toxic Waste

Yes

Qualitative

Non-Specific
Oil or Chemical Spills

No

Environmental
Fines and Penalties

No

Qualitative
Yes

Totals

Specific

2
6

Final Disclosure Score = Quality Score / Occurrence Score = 6/3 = 2


Examples of scored disclosures:
Qualitative: In addition, the Company has been identified as a potentially responsible party for
investigation and cleanup costs at a number of locations in the United States and Puerto Rico under
federal remediation laws and is voluntarily investigating potential contamination at a number of
Company-owned locations (Abbot Laboratories, 1993).
Qualitative specific: The Company had also been named in several groundwater contamination suits,
nearly all related to its former agricultural pesticide, ethylene dibromide (EDB), which was banned by
the U.S. government in 1983. These cases, primarily in Florida, California, and the State of Washington,
stem from uses of EDB approved by all governmental regulatory agencies prior to its ban. All suits
remaining in Florida and the State of Washington were settled by 1991 in amounts not material to the
Company's financial results. The only significant remaining suit is in California, where the Company is
one of many defendants named. The Company is actively defending itself in this suit and does not now
believe that this case will result in material financial consequences for the Company (Great Lakes
Chemical, 1991).
Quantitative: Alcoa's remediation reserve balance at the end of 1994 was $329 and reflects the most
probable costs to remediate identified environmental conditions for which costs can be reasonably
estimated. About 28% of this balance relates to Alcoa's Massena, New York plant site. Remediation costs
charged to the reserve were $79 in 1994, $71 in 1993, and $102 in 1992. They include expenditures
currently mandated, as well as those not required by any regulatory authority or third parties (Aluminum
Co. of America, 1994).

37