Site uncertainty, allocation uncertainty, and superfund liability valuation.

The article investigates the role of uncertainty in the estimation of American firms' financial obligation for contingent Superfund liabilities in radioactive waste sites. The amount and timing of a firm's ultimate financial obligation for contingent liabilities is uncertain and subject to the outcome of future events. Superfund contingent liabilities are decomposed into two sources: (1) uncertainty regarding site clean-up cost; and (2) uncertainty regarding allocation of total site-clean-up cost across multiple parties associated with the site. It can be hypothesized that when a firm's contingent Superfund liabilities are subject to relatively more site and allocation uncertainty, these liabilities will be viewed as relatively risky. This risk will affect the firm's cost of capital. Thus, market valuation of contingent Superfund liabilities will be negatively affected. In the chemical industry, both site and allocation uncertainty are associated with differential valuation of contingent Superfund liabilities. The greater the uncertainty, the more negatively the contingent Superfund liability is valued. Results are insignificant, however, in the paper and machinery industries. The results provide evidence; at least in the most heavily involved industry, that site-level information of a non- financial nature can be relevant to financial statement users.