An Empirical Examination of Factors Affecting the Timing of Environmental Accounting Standard Adoption and the Impact on Corporate Valuation

Abstract

This paper assesses factors associated with firms' adoption of a new Canadian accounting standard promulgated in 1990, which requires disclosure of future removal and site restoration costs. Empirical analysis shows that adoption of the new standard by mining and oil and gas companies was influenced by a variety of factors and that disclosure of provisions for future removal and site restoration costs is valuation-relevant. More specifically, firms with a strong environmental commitment and in better financial health and those with less inherent uncertainty regarding future removal and site restoration costs were more likely to voluntarily adopt the new standard early. In addition, firms that adopted the new standard by the mandatory adoption date were more likely to have been audited by a Big 6 audit firm and to have raised capital during the year. Valuation analysis based on Ohlson (1995) suggests that disclosure of the provisions is valuation-relevant as it may enable capital markets to proxy for future removal and site restoration liabilities.