The accuracy of financial report projections of future environmental capital expenditures: a research note

Abstract

Financial report environmental disclosure has been widely criticized because the extent of disclosure both varies in response to exposures facing the firm and because it is not an accurate measure of firm environmental performance. This study suggests there are at least two potential problems that need to be addressed before this disclosure can be completely condemned as meaningless. A first potential problem is the earlier studies' focus on broad measures of environmental disclosure. Hidden within those broader measures may be pieces of meaningful information. Second, while the disclosure examined previously may not correspond well with past environmental performance, it, or at least parts of it, may still provide meaningful information for assessing future environmental action. This study attempts to address these shortcomings by examining one specific, but potentially useful, category of environmental disclosure: projections of future spending for pollution abatement and control equipment. Based on 355 sets of projected/actual spending drawn from 10K reports filed with the US's Security and Exchange Commission between 1993 and 2002, inclusive, results suggest that the projections may be more misleading than meaningful. Actual spending was lower than the projected amount for more than 75% of the observations, and the mean projection error (the difference adjusted for the size of the projection) was a negative 16.4%. Analysis of projection errors for a 2-year, rather than a 1-year window revealed a similar distribution. In contrast to the accuracy of the environmental capital expenditure projections, the actual/projection difference for total capital expenditures was very small, suggesting that it is not a difficulty in estimating future capital spending that is driving the error results. The projection errors also did not appear to be a function of changes in company revenues or profitability. Overall, therefore, it appears that, similar to broader measures of corporate environmental disclosure, projections of future spending on environmental control lack value.