Risk Premiums for Environmental Liability
Does Superfund Increase the Cost of Capital?
Superfund liability may impose financial risk on investors and thereby increase firms’ costs of capital. Monthly stock returns are analyzed for 73 chemical companies using several measures of Superfund exposure. Additional exposure appears to increase costs of capital for larger firms, but perhaps not for smaller firms. From 1988 to 1992, an average increase in the cost of capital is estimated for 23 larger firms of between 0.25 to 0.40 percentage points per year. The social cost of Superfund-related financial risk in the chemical industry may be as high as $800 million annually, or enough to clean up about 20 sites.
Originally published in: Journal of Environmental Economics and Management, v. 36, no. 3, 1998, pp. 267-294, B-1-B-10.
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