Site uncertainty, allocation uncertainty, and superfund liability valuation

Abstract

The amount and timing of a firm's ultimate financial obligation for contingent liabilities is uncertain and subject to the outcome of future events. We decompose uncertainty about Superfund contingent liabilities into two sources: (1) uncertainty regarding site clean-up cost (site uncertainty); and (2) uncertainty regarding allocation of total site-clean-up cost across multiple parties associated with the site (allocation uncertainty). We hypothesize 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..