LIBRAR Y
Michigan Stan:
University

 
     

This is to certify that the
thesis entitled

AN EMPIRICAL EXAMINATION OF THE EFFECTS OF
ENVIRONMENTAL DISCLOSURES ON INVESTORS
IN THE CAPITAL MARKET

presented by

Donald Walter Hicks

has been accepted towards fulfillment
of the requirements for

Ph.D. Business - Accounting

degree in

 

 

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DONALD WALTER HICKS

1978

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AN EMPIRICAL EXAMINATION OF THE EFFECTS OF
ENVIRONMENTAL DISCLOSURES ON INVESTORS
IN THE CAPITAL MARKET

by

Donald Walter Hicks

A DISSERTATION

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Accounting and Financial Administration

1978

 

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ABSTRACT

AN EMPIRICAL EXAMINATION OF THE EFFECTS OF
ENVIRONMENTAL DISCLOSURES ON INVESTORS
IN THE CAPITAL MARKET

by
Donald Walter Hicks

This research was conducted to see if environmental
disclosures required by the Securities and Exchange Commis-
sion (SEC) in financial statements were associated with
statistically significant differences in trading volume.
The basis for the research was Securities Act Release No.
5386 issued in 1973, which amended SEC reporting forms to
incorporate disclosure of the effects of compliance with
statutory requirements respecting environmental quality
upon the registrant. The largest block of initial disclo-
sures came in 10-Ks for 1973 calendar year firms, and this
was the critical event for the research.

Previous research had shown a volume reaction in the
stock market to earnings announcements. A part of the
lO-K is the income statement, which includes an earnings
announcement. Therefore, the test procedure had to allow
for a possible volume reaction for all firms at the time

of the receipt of the lO-K. For that reason, a change

 

ir.

be

Wee
The
Ser

tes

Donald Walter Hicks
statistic was used. Specifically, the percentage change in
the daily percentage of shares traded for corresponding two
week blocks from periods surrounding the receipt of 1972
lO-Ks to periods surrounding the receipt of 1973 lO-Ks. In
this way, any volume reaction to the earnings announcements
would cancel out.

Three groups were tested. The test group consisted of
firms initiating environmental statute compliance effect
reporting in 1973 lO-Ks. The first control group consisted
of firms which began reporting the effects of compliance
with environmental statutes before 1972 lO-Ks. The second
control group was made up of firms which as of 1973 lO-Ks
made no mention of the effects of compliance with environ-
mental statutes. Firms with sources of known volume reac-
tion in the periods from which data were gathered were
eliminated, e.g. any firm with a dividend announcement in
the six weeks surrounding the receipt of the 10-K for either
1972 or 1973 was excluded. Firms which initiated the envi-
ronmental disclosure signal in 1972 reports had to be elim-
inated. If the market reacted to the signal, it would have
been included in 1972 data for those firms.

There were three periods for test purposes. The two
week period of the receipt of the lO-Ks was the test period.
The two week periods on either side of the test period
served as control periods. Using a Kruskal-Wallis ranking

test, all three groups were tested to see if their change

Donald Walter Hicks
in volume was the same in each of the periods. Results
indicate that the change in volume was not different for
the three groups in either control period surrounding
receipt of the lO-K. In the test period, however, the
test group was shown to have a statistically different
percentage change in the daily percentage of shares traded
than did the two control groups. The reactions of the con-
trol groups were still not different from each other.

Based on this evidence, the conclusion is drawn that
there is a statistically significant volume reaction in
the capital market associted with disclosure of the effects
of compliance with environmental statutes on the firm. The
data show that the reaction is less trading for the firms

making the environmental disclosure.

This dissertation is dedicated to
my Father and his people; especially
Duane and Pat Milano.

iii

ACKNOWLEDGMENT S

It is impossible to list everyone who has been of
assistance during the Ph.D. program. To all the unnamed
faculty, staff, and friends I express my gratitude.

Special thanks go to my dissertation committee,
Professor Steven Dilley, chairman, and Professors Melvin
O'Connor and Richard Simonds.

Great appreciation is due the Haskins & Sells
Foundation for its financial assistance during my disser-

tation endeavor.

iv

 

L]

C17

II]

IV.

TABLE OF CONTENTS

Page
LIST OF TABLES o o o o o o o o o o o o o o o o o o o Vii
LIST OF FIGURES o o o o o o o o o o o o o o o o o o Viii
Chapter
I 0 INTRODUCTION 0 O O O O O O O O O O O O O O 1
Purpose . . . . . . . . . . . . . . . . 1
General Public Interest . . . . . . . . 2
Social Accounting . . . . . . . . . . . 6
Economic Theory . . . . . . . . . . . . 10
Mutual Funds. . . . . . . . . . . . . . 13
Shareholder Campaigns . . . . . . . . . 15
Investors . . . . . . . . . . . . . . . 19
Market Reaction to Environ-
mental Data. . . . . . . . . . . . . . 22
smary O O O O I O O O O O O 0 O O O O 24
II. SECURITIES AND EXCHANGE COMMISSION. . . . 26
Background of SEC Requirements. . . . . 26
SEC Environmental Pronouncements. . . . 28
Disclosure Requirements & the
Research Question. . . . . . . . . . . 38
III 0 TEST DESIGN 0 O O O O O O O O I O O O O O 40
Test Variable . . . . . . . . . . . . 40
Previous Volume Studies . . . . . . . . 42
Test Design . . . . . . . . . . . . . . 53
Specific Volume Variable. . . . . 53
TeSto O O C O O O O O O O O O O O 57
Summary . . . . . . . . . . . . . . . . 61
Iv. SWLE SELECTION O O O O O O O O O 0 O O O 63
Initial sample. 0 O O O I O O O O O O O 63
Disclosure Samples. . . . . . . . . . . 66
Disclosures from Annual Reports
to Stockholders. . . . . . . . . . . . 67

Chapter Page

Disclosures from 10-Ks filed

With the SEC 0 O O O O O O O O O O O O 70
Sample Refinement . . . . . . . . . . . 74
The Sample. . . . . . . . . . . . . . . 79
V. RESULTS 0 O O O O O O O O 0 O O O O O O 0 82
The Kruskal—Wallis Test . . . . . . . . 82
Scheffe’ Post Hoc Results . . . . . . . 86
Conclusions . . . . . . . . . . . . . . 90
Limitations & Suggestions for
Further Research . . . . . . . . . . . 92
APPENDIX I - Sample Firms . . . . . . . . . . . . . 95
BIBLIOGRAPHY. . . . . . . . . . . . . . . . . . . . 99

vi

 

Tab]

2-1

LI ST OF TABLES

Table Page

2-1 Chronological List of Securities Act
Releases (SARs) on Environmental

Disclosures . . . . . . . . . . . . . . . 29
4-1 Sample Refinement . . . . . . . . . . . . . 75
5-1 Kruskal-Wallis Test . . . . . . . . . . . . 84
5-2 Test Period Rank Clusters . . . . . . . . . 85
5—3 Test Period Rank Summary Statistics . . . . 86

vii

LIST OF FIGURES

Figure Page
2-1 Time Continuum of Critical Events in
the Development of SEC Ecological
Reporting. . . . . . . . . . . . . . . . 33

3-1 Data Blocks. . . . . . . . . . . . . . . . 56

viii

CHAPTER I

BACKGROUND

Purpose

In July of 1971 the Securities and Exchange Commission
(SEC) began requiring registrants to disclose the effects
that compliance with statutory requirements concerning
environmental quality may have had on the registrant's busi-
ness. As public interest in ecology increased in the late
nineteen sixties, some businesses revealed the effect that
maintaining or recovering a clean environment would have on
their firm in their annual reports. As a consequence of
these disclosures, the question has arisen as to whether or
not this data possessed informational content.

The Efficient Market Hypothesis (EMH) states that the
securities market reacts instantaneously, or nearly so, and
in an unbiased fashion to any new information. Hence, under
the EMH, if disclosures about the effects that compliance
with statutes regarding environmental quality may have had
on a business have any informational content in the capital
market, one would anticipate a reaction in the capital mar-
ket associated with the disclosures. The purpose of this
research is to examine the relevance of environmental dis-
closures in financial statements to individual participants

1

 

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in the capital market. Specifically, are environmental
disclosures required by the SEC in financial statements
associated with statistically significant differences in
trading volume?

In recent years the SEC has come under increasing pres-
sure to enlarge its disclosure requirements regarding mat-
ters of ecological significance. The remainder of this
chapter will examine evidence about a growing conscientious-
ness concerning ecology and the effects of human actions on
the ecological system which was manifest in the late nine-

teen sixties and early seventies.

General Public Interest

 

Two fairly obvious ways to determine if the general
public has any interest in something are (l) to ask them,
and (2) to look for events evidencing interest in a par-
ticular area. This section will examine three surveys of
public opinion on the environment and then mention some
events evidencing such interest. Other events will be
examined in subsequent sections.

In the spring of 1970 Arvin W. Murch surveyed people
living in Durham, North Carolina.1 A random sample of 300
residents was selected for the study, and 75% of the sample

responded to the questionnaires. Of the respondents, 74%

 

1Arvin W. Murch, "Public Concern For Environmental
Pollution," Public Qpinion Quarterly, Spring 1971,
pp. 100-105.

 

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considered pollution a serious problem in the U.S., yet
only 13% considered it a problem in Durham. This was de-
spite the fact that air pollution in Durham exceeded the
national average. A possible explanation given for this
finding was the national nature of news on the environment,
with recent media reporting on the pollution problem,
including local ratio, television, and newspapers, focusing
on the national aspects rather than local aspects of pollu-
tion. When asked if they would favor the construction of a
new industrial plant in Durham which would provide many jobs,
but would also pollute the environment, 50% opposed construc-
tion and only 20% favored construction. (19% couldn't decide
and 11% didn't answer the question). The important aspects
of this study were that residents of Durham had been exposed
to the problems of pollution via the media, chiefly tele-
vision, newspaper and magazine articles, they considered
pollution to be a problem, albeit a national rather than
local problem, and they were opposed to the addition of an
industry which would add to the local pollution.

Concurrently, Rita James Simon conducted a survey in
the State of Illinois.2 This was a telephone survey, with
345 names drawn from the directories for 60 counties. Con-
tact was made with 265 people, and 65% of those (170 people)

agreed to participate in the telephone interview. Over 90%

 

2Rita James Simon, "Public Attitudes Toward Population
and Pollution," Public Opinionguarterly, Spring 1971, pp.
93-99.

(I)

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4
of the respondents in this survey stated that water and air
pollution were a problem today. Yet when asked what the
most important problem facing the country today was, before
any particular problem was mentioned, only 13% answered pol-
lution. Other frequent answers were racial, inner city, and
student protests. (The question was worded to exclude the
Vietnam War.) Only 50% approved of the high priority assign-
ed to solving the pollution problem by President Nixon. It
is apparent that this study revealed mixed results, yet it
did indicate some public consiousness of pollution.

In 1973, Barnett A. Greenberg and Roy A. Herberger pub-
lished the results of a survey of the Atlanta and Los Angeles
areas.3 The study checked for both concern for and knowledge
of ecology, with concerned defined in terms of action taken,
e.g. purchasing low phosphate detergents. Although both
areas scored well in knowledge, Los Angeles showed a sig-
nificantly higher concern for the environment. The authors
felt this might have been because of the well publicized
smog problem in Los Angeles. Young white-collar profes-
sionals scored highest in both knowledge and concern. These
results indicate there is a segmentation of people willing
to take overt action to alleviate pollution.

The opinions of business executives were surveyed in

 

3Barnett A. Greenberg and Roy A. Herberger, "Is There
an Ecology-Conscious Market Segment?" Atlanta Economic
Review, March-April 1973, pp. 42-44.

 

 

in

5
1970.4 The results indicated that business leaders, like
other citizens, thought protection of the environment was an
important national problem. Surprisingly, over 50% of the
executives favored government regulation and over 80%
believed the environment should be protected even if it
meant inhibiting the introduction of new products, fore-
going an increase in production, or reducing profits.

The effects on business executives can be thought of as
occurring because executives themselves are part of the
general public, and therefore are included in any general
public trends, or it is possible that the executive atti—
tudes reflect reaction to the attitudes of the public at
large. Legislation is more likely to be a response to pub-
lic opinion. Among the major federal acts are the National
Environmental Policy Act of 1969, the Clean Air Act of 1970,
The Resource Recovery Act of 1970, the Federal Water Pollu-
tion Control Act Amendments of 1972, and the establishment
of a national environmental data system in 1972 (HR 56).
Other pieces of evidence for interest in ecological problems
include special television broadcasts, numerous magazine
and newspaper articles, and the establishment of funds for
loans at preferred rates for cleaning up the environment by

banks.5 Other events will be examined in the remainder

 

4Robert 8. Diamond, "What Business Thinks - The Fortune
500-Yankelovich Survey," Fortune, February 1970, pp. 118-
119, 171-172.

5Fredrick R. Miller, "Environmental Investing," Journal
of Commercial Bank Lending, May 1971, pp. 32-35.

 

 

Irn

III

of this chapter.

Social Accounting

 

The idea that financial reporting encompasses social
responsibility is not entirely new. In 1944, A. C. Littleton
wrote:

Accounting for a long time has possessed a
significance that extended beyond the boundaries

of the business enterprise directly concerned.

The possibilities of a wide serviceability are

not new; but general recognition of the possi-

bilities in accounting is recent.6

The statement is still appropriate today. Professor
Littleton went on to talk about desired educational programs
for business students in order to develop good citizens.
Early social accounting dealt with GNP accounting. Recently
social accounting has expanded its coverage. A workable
current definition is provided by Lee Seidler:

As a general guide, social accounting is

the modification and application, by accountants,

of the skills, techniques and discipline of con-

ventional (managerial and financial) accounting,

to the analysis and solution of problems of a

social nature.7

In the seventies accountants began attacking social

problems in earnest. Today the American Accounting Assoc-

iation regularly puts out committee reports on some aspect

 

6A. C. Littleton, "The Accounting Exchange," The
Accounting Review, July 1944, pp. 315-323.

7Lynn L. Seidler and Lee J. Seidler, Social Accounting:
Theory, Issues, and Cases (Los Angeles: Melville Publish-
ifig Company, 1975), p. ix.

7
of social accounting.8 A frequent route taken involves the
social audit. Social audits involve the matching of social
benefits and social costs to arrive at a net social surplus

or deficit. Relatively formal models have been proposed by

Corcoran and Leininger,9 Linowes,lo Abt,11 and Estes.12

13 14

Less formal models come from Beams and Fertig,

Clausen,ls Dilley and Weygandt,16 and the American Accounting

Marlin,

Association's Committee on Environmental Effects of

 

8For example "Report of the Committee on Measures of
Effectiveness for Social Programs," The Accounting Review
Supplement 1972, or "Report of the Committee on Environ-
mental Effects of Organization Behavior," The Accounting
Review Supplement 1973.

9Wayne A. Corcoran and Wayne E. Leininger, Jr., "Finan-
cial Statements - Who Needs Them?" Financial Executive,
August 1970, pp. 34-38, 45-47.

10David F. Linowes, "An Approach to Socio-Economic
Accounting," Conference Board Record, November 1972, pp.
58-61.

11Abt Associates Inc., 1972 Abt Associates Inc. Annual
Report and Social Audit. Cambridge.

12Ralph W. Estes, "A Comprehensive Corporate Social
Reporting Model," In Social Accounting; Theory, Issues,
and Cases, Lee J. Seidler and Lynn L. Seidler (Melville
Publishing Company, 1975), pp. 185-204.

l3Floyd A. Beams and Paul E. Fertig, "Pollution Control
Through Social Cost Conversion," The Journal of Accountancy,
November 1971, pp. 37-42.

l4John Tepper Marlin, "Accounting for Pollution," The
Journal of Accountancy, February 1973, pp. 41-46.

15A. W. Clausen, "Toward an Arithmetic of Quality,"
The Conference Board Record, May 1971, pp. 9-13.

16Steven C. Dilley and Jerry J. Weygandt, "Measuring
Social Responsibility: An Empirical Test," The Journal
of Accountancy, September 1973, pp. 62-70.

 

 

 

 

8
Organization Behavior17 among others. Social audits were
concerned about environmental matters as a portion of over-
all social performance, yet many of the models concentrated
on the environmental aspects. Beams and Fertig, for example,
proposed an accrual accounting system for pollution, based
on the view that:
Accounting as an organized profession has

the responsibility to transcend the internal

viewpoint of a private firm and to develop infor-

mation which portrays a private firm's role in

and contribution to society.18

In order for data to possess informational content it
must be useful. There are many potential uses and users of
reported data. One such use is in the capital market. If
it can be shown that investors respond to a type of social
data, then it can be said that the data is information in
the capital market. It should be noted that the inclusion
of pollution control expenditures, or any new disclosures
on financial statements, has a major impact on the auditor:

... auditors face a serious and imminent

need to consider the impact of pollution control

on financial statements. This author recommends

that: (l) auditors should consider the adequacy

of the pollution control of the firm under audit;

(2) when no control exists, the auditor should

consider his alternatives in light of possible
adverse effects on the firm; (3) the auditor

 

17Committee on Environmental Effects of Organization
Behavior, "Report of the Committee on Environmental Effects
of Organization Behavior," The Accounting Review Supple-
ment 1973, pp. 72-119.

18Floyd A. Beams and Paul E. Fertig, "Pollution Con-
trol Through Social Cost Conversion," The Journal of
Accountancy, November 1971, p. 37.

 

 

 

9

should determine that management has made appro-
priate disclosure of pollution control matters
either in footnotes to the financial statements,
or in monetary terms in the body of the financial
statements, or both; and (4) the auditor should
be prepared to modify his opinion when circum-
stances warrant. These circumstances could
include the inapplicability of the going-concern
assumption or the possibility that the firm has
materially overstated its income by not accruing
the cost of controlling pollution. 9

It would, therefore, behoove the profession to investi-
gate the usefulness of environmental disclosures before
tacking them on to audited statements. That this is of
concern to practitioners was brought out by Michael P.
Cerisano, a partner in Elmer Fox & Company:

A basic accounting concept is that infor-

mation collected will be useful to an interested

party for the purpose of forming judgments about

the activities of an organization. Unfortunately,

present-day accounting systems do not satisfy this

fundamental requirement when applied to gauging

social responsibility in the private or public

sectors.20

The overriding importance of environmental factors in
current social accounting is illustrated by the fact that
in the Fortune 500 annual reports for 1977 pollution—control
expenditures require more financial resources than any other

. . 21
soc1a1 acconting area.

 

19Thomas D. WOod, "A New Reporting Problem for Auditors -
The Impact of Pollution Control on Financial Statements,"
The Journal of Accountancy, March 1972, p. 76.

20Michael P. Cerisano, "SMS: Social Measurement
Systems for the Future - A Practitioner's Preview," CPA
Journal, May 1974, p. 26.

21Ernst & Ernst, "Social Responsibility Disclosure:
1977 Survey of Fortune 500 Annual Reports," 1977, p. 13.

10

Economic Theory

 

Classic economic theory has presented pollution as an
externality. If pollution is an externality, then expendi-
tures to control pollution or to clean up pollution have no
benefit for the firm making the expenditure, and ceteris
paribus, would put the firm at a competitive disadvantage
which in pure competition would drive the firm out of
existence. Clearly, if this were the case, an investor
upon reading about expenditures for pollution control would
want to immediately sell any stock he had in such a firm if
his incentive was economic. If all investors had the same
economic incentive in pure competition, no one would buy
the stock since no one would want to own stock in a firm
destined to failure. If one assumed social consciousness
on the part of investors and customers; then the stock might
have some attraction. But in pure competition the only
expenditure that would be beneficial to the firm would be
made to the upstream or upwind firm to induce that firm to
reduce its pollution and thereby reduce costs to the paying
firm.

In 1969, William P. Gramm published an article in which
he argued that the economic system may motivate firms to
abate pollution in the absence of pure competition, if one

assumed some social concern on the part of the public.22

 

22William P. Gramm, "A Theoretical Note on the Capacity
of the Market System to Abate Pollution," Land Economics,
August 1969, pp. 365-368.

11
He argued that if consumers are motivated enough to pur-
chase on the basis of non-pollution, then corrective action
against pollution can be a source of product differentia-
tion. This argument would hold up best under an oligopo-
listic market structure. In pure competition the firm
would lack the resources to fight pollution, but oligopo-
listic and monopolistic firms could have sufficient finan-
cial reserves and research capabilities. Due to a strong
market position a monopoly might lack the motivation to
abate pollution in response to consumer demands. Yet even
in a monopoly potential competition or government regula-
tion might force the firm into some pollution abatement.
In such a situation pollution abatement expenditures of a
firm would be a signal that investors would respond to
since the firm will increase its share of the consumer
market as a result. It would also be possible that the
costs of fighting pollution would not increase costs to
the firm, since advertising might be decreased thanks to
product differentiation.

For both the case of pure competition, and product
differentiation under either oligopoly or monopoly, it was
necessary to assume some form of general public interest
in preserving the environment - an interest strong enough
to result in some action which entailed a degree of economic
sacrifice. If the externality of environmental protection
can in some way be internalized, this assumption can be

relaxed.

12

A method of internalizing environmental costs even in
the case of pure competition would be government regula-
tion. If the government required some level of environ-
mental maintenance for all firms, the costs would be
internalized and all firms would have to meet that level
of ecology protection or go out of business. (Alterna-
tively it might be possible, even prudent, to not meet the
standards provided the noncompliance penalties were less
than the cost to the firm of compliance and there was no
general public interest in environmental protection.)

In this situation, disclosures about the effects of
compliance with environmental protection statutes could be
of interest to investors for economic reasons. If all
firms would eventually have to meet the standards, then
the costs to individual firms to comply would be meaningful
information, since before the fact different firms might be
in different situations regarding the environment. Some
firms would have to commit more resources to meet the
standards than others. For marginal firms with the high
polluting characteristics the costs of compliance might be
very great, while for others the costs could be minimal.
Thus in this situation, investors with no concern for the
environment per se, would be interested in the effects of
compliance with environmental protection statutes on the
firm.

If one assumed public interest, in all cases there would

exist the potential for investor reaction to environmental

13
expenditures. If one didn't assume public interest, then
the reaction could still occur if the expenditures were
in response to government regulations, the case being
tested in this research, provided the costs of pollution
abatement were less than the penalty for noncompliance with
theenvironmental protection statutes. Thus from an eco-
nomic standpoint there is reason to anticipate investor
reaction to disclosures about the effects of compliance
with environmental protection statutes from both ecology-
conscious investors for environmental reasons, and non

ecology-conscious investors for economic reasons.

Mutual Funds

 

Four mutual funds have been set up with social objec-
tives, and have met with limited success. The Dreyfus
Third Century Fund was established in May of 1971. The
fund evaluates prospective investments and portfolio com-
panies for environmental protection and improvement, occu-
pational health and safety, consumer protection, product
purity, and equal employment opportunity. The initial
offering of $24,300,000 was completed in 1972. The fund
operates on the following premises:

(1) Private investment can be a positive force to

to achieve social progress.

(2) By employing social as well as financial criteria,

the Fund may encourage business enterprises to

act with respect to social matters in such a way

14
that their securities will become eligible
for purchase by the Fund; other investors may
also be encouraged to employ similar portfolio
evaluation techniques.

(3) Although application of social criteria will
narrow the range of enterprises eligible for
investment, there will be sufficient investment
opportunities meeting the Fund's criteria to
permit it to be fully invested.

(4) Business enterprises demonstrating concern for
the social aspects of their activities, and
leadership in dealing with them, are also likely
to excel in profits and growth.

(5) Individual and Institutional investors will
entrust substantial sums of money to the Fund
on the basis of the foregoing premises.

The fund maintains a list of firms which are eligible
for investment, but this list is not made public. The
Dreyfus Third Century Fund is still active.

The Pax World Fund began offering shares in August of
1971. It is directed by Dr. Luther E. Tyson, a Methodist
minister, and its major social objective is the promotion
of world peace. It invests in firms whose business is non-
military. The Department of Defense's 100 largest con-
tractors are excluded from consideration. The fund also
avoids firms in the liquor, tobacco, and gambling indus-

tries; and tries to favor firms with fair employment.

15
This fund is also still active.

The other two mutual funds with social objectives have
been less successful. The First Spectrum Fund attempted to
avoid enterprises which did not fully comply with existing
laws relating to the protection of the environment, civil
rights, and consumer protection. If companies whose shares
were held by the fund subsequently violated full compliance,
the fund would either sell the shares or try to bring about
full compliance through persuasion and voting. The First
Spectrum Fund waa deregistered on September 24, 1974.

Social Dimensions Funds never really got off the
ground. Like the other funds it was to seek investments
for social as well as economic purposes, but it has not
acquired any assets. Of the four funds, The Dreyfus Third
Century Fund had the advantage of financial experience and
the backing through the Dreyfus Corporation. Yet the Pax
World Fund has managed. First Spectrum Fund had no real
backing, and Social Dimensions Fund stumbled at the starting
gate. A major problem all the funds faced was that the
kind of data they needed in order to pursue their goals
was not readily available. Yet the success of two of the
four indicates some investor interest in social data for

investing decisions.

Shareholder Campaigns

 

One method in which interest in social aspects of cor-

porate activity was evidenced in the late 60's and early

16
70's was in shareholder campaigns, also known as proxy
actions. These actions were in contrast to the traditional
"Wall Street Rule" which espoused the view that if one did
not support management on issues put forth to stockholders,
the natural course of action was to reduce holdings. Proxy
actions did not supplant investment reduction, but rather
supplemented that course of action.

The basic tactics of a shareholder campaign began with
the identification of an area of social concern in which
the campaign initiator believed the firm was deficient.
Negotiation was often employed as a first means of improve-
ment. If the negotiation process failed, the fight was
carried to shareholders through proxy proposals.

The first such activity was the Kodak-FIGHT Campaign
in 1967. This campaign was concerned with civil rights
and the hiring of unskilled black ghetto workers in
Rochester, New York. FIGHT was organized by Saul D.
Alinsky and had the backing of several church groups that
held Kodak stock. Although the campaign received only a
minute number of actual votes, it nevertheless realized its
goals of more black employment, and recognition as a bar-
gaining agent by Kodak. The success of the Kodak-FIGHT
Campaign in accomplishing its objectives inspired more
proxy actions.

The most publicized proxy action was Campaign GM. This
action included environmental considerations. It was

financed for a little more than $30,000 and originally

17
offered nine proposals for inclusion in the proxy state-
ment. However, GM was successful in blocking all but two
of the proposals. One would have added three people
elected by the public to the board of directors, and the
other would have set up a committee on corporate respon-
sibility. Neither proposal received 3% of the vote, but
the action did produce some results.

GM ran an extensive campaign against the proxy action.
Included in management's efforts were full-page advertise-
ments in 150 newspapers which described among other things
General Motors' progress in air pollution control. Some
large investors voted for the proposals, and others while
not actually voting for the proposals included statements
of support for many.of the objectives of Campaign GM along
with their proxy statements.

After the apparently unsuccessful campaign, GM took
steps to improve its performance in social areas including
the following measures relating to environmental quality:

(1) A committee of six scientists was formed to

advise the corporation on technical matters
including the effects GM had on the environment.

(2) Professor Ernest S. Starkman from the Univer-

sity of California was appointed vice president
in charge of environmental affairs.

(3) General Motors spend $188 million in the next

year to fight pollution.23

 

 

23Bevis Longstreth and H. David Rosenbloom, Corporate
Social Responsi ility and the Institutional Investor, pp. 7-8.

18

Campaign GM made another effort the following year.

As in the 1970 action, the Stern Foundation provided most
of the funding with a $30,000 grant. There were only
three proposals this time, and all were included in the
proxy statement without resistance. The third proposal
would have required GM to disclose data on anti-pollution
control, auto-safety, minority hiring, and franchising
practices in its annual report to stockholders.

Despite increased institutional support, the campaign
received less overall support than the 1970 effort. Pro-
posal three got the most votes, 2.36% of those cast.
Various reasons have been given for the failure of Campaign
GM - Round II. Foremost among them that GM had made con-
siderable progress in social areas since the first campaign.
As far as environmental matters are concerned, GM had
reported on the effects of compliance with environmental
statutes in its 1970 annual report.

Many other proxy contests have been waged seeking

24 but the ones discussed above

environmental disclosures,
illustrate the basic process. Proxy actions have been
successful in accomplishing desired objectives without
getting very many actual votes. Just what level of public

support the ations illustrate is, therefore, not clear.

 

24For example Fidelity Trend Fund in 1971, Ford Motor
Company in 1972.

19

Investors

 

This section deals with the existence of investors who
would make investing decisions on the basis of social data.
As a part of the research for their book, Longstreth and

25 The initial

Rosenbloom surveyed institutional investors.
sample consisted of 23 religious organizations, 28 univer-
sities, 44 foundations, 34 insurance companies, 40 banks,
and 27 mutual funds; for a total of 196. The response rate
was 58.7% (115 institutions).

42.6% of the respondents indicated a recent or in prog-
ress review of the social aspects of their investing policy.
The remaining 57.4% said they already used social criteria
in evaluating investments, with seventeen institutions indi-
cating that a portion of their investments were made up of
firms with a good social record, where economic factors were
secondary.

Religious institutions referred to a moral obligation
in investing. Many of them specifically included under the
moral obligation the avoidance of polluting firms, e.g. the
Central Conference of American Rabbis and the United Church
of Christ. In this regard many expressed a willingness to
accept a lower rate of return in exchange for a socially

oriented investment:

What the new guidelines mean, in essence,
is that with unrestricted funds the church

 

25Bevis Lon streth and H. David Rosenbloom, Cor orate
Social Responsi ility and the Institutional InvesEo¥7"ppT

41‘700

 

20

should be willing to accept a lower rate of

return, and accept a higher degree of risk in

some of our investments, in order to place our

money where it will do the most social good.

Ordinarily, one seeks the most interest for

one's money, for example, but we shall be

willing to accept less where a bank is invest-

ing in black real estate or black companies,

or a company is battling pollution, or is

accomplishing similar social improvements.26

The religious institutions employed ongoing evaluations
of the social aspects, including environmental, of invest-
ments and potential investments.

Other institutional responses to the survey were similar.
Universities were less likely to alter holdings in response
to social revelations since they expressed a belief in an
obligation to maximize returns. Banks believed that sound
social and ecological policies were consistent with good
management. Insurance companies were quite strong in their
social responsiveness, while foundations were the least
enthusiastic of the groups. Mutual funds tended to agree
with banks that management of resources whether financial,
ecological, or otherwise essentially involved the same
expertise.

Donald L. Kyle and Fred A. Jacobs expressed in a com-
mentary in 1972 that, "With the current interest in ecology,
it is thought that some investors may be reluctant to con-

sider investments in a farm that only appears profitable

because of the omission of social costs from financial

 

26Robert V. Moss, President of the United Church of
Christ, quoted in Longstreth and Rosenbloom, p. 46.

21

statements."27

Evidence for this viewpoint was brought out
in the SEC's public hearings on disclosure requirements for
environmental and other social items. Some participants in
the hearings indicated that they would refuse to purchase
shares of offending firms.28 In response to this type of
interest, some brokerage houses employ specialists to iso-

29

late investments that are socially acceptable. In 1971,

Jonathan J. Prinz of CBWL-Hayden Stone Inc., submitted a

30 About

list of eight stocks that were socially acceptable.
the time of the publication of the list, however, one of the
firms was accused by the Federal Trade Commission of false
advertising and misusing confidential information from

31 Thus although the data might be desired, it has

clients.
not been easy to get.

The facts that l) investors have indicated a desire for
social data; 2) brokers have employed analysts to find
socially conscious firms; and 3) some investors have indi-

cated a willingness to alter holdings or not acquire shares

from offending firms all indicate a degree of investor

 

27Fred A. Jacobs and Donald L. Kyle, "Social Cost Con-
version - A Commentary," Journal of Accountancy, December
1972, p. 30.

28Securities and Exchange Commission, Securities Act
of 1933 Release No. 5627, Securities Exchange Act of 1934
Release No. 11733, October 14, 1975.

29Walter Goodman, "Stocks Without Sin," Harper's
Magazine, August 1971, p. 67.

30

 

In Goodman, p. 67.
31Longstreth and Rosenbloom, p. 93.

22

interest in social data, including environmental disclo-

sures .

Market Reaction to Environmental Data

 

In January of 1978, Barry H. Spicer published a study
which evaluated the association of environmental perform-
ance and five measures of investment value for firms in the

paper industry.32

The study was made possible because of
work done by the Council on Economic Priorities. The
Council was formed by Alice Tepper Marlin in 1970 to
research corporate activities in socially responsible areas.
This group made two studies on the efficacy of water and
air pollution control systems in mills owned by 24 firms
in the pulp and paper industry. The studies were done in
1970 and 1972 and afforded a unique opportunity for testing
pollution control effectiveness association with financial
measures of the companies involved. Spicer used 18 of these
firms in his study; four were excluded because less than 25%
of their sales were in the paper industry, and two were
omitted because they were not included on the COMPUSTAT
tape from which financial data was gathered.

The study was designed to see if companies with better
pollution control records had 1) higher profitability;

2) greater asset size; 3) lower total risk; 4) lower

 

32Barry H. Spicer, "Investors, Corporate Social Per-
formance and Information Disclosure: An Empirical Study,"
The AccountingAReview, January 1978, pp. 94-111.

 

23
systematic risk; and 5) higher price/earnings ratios than
did companies with poorer pollution control records. This
study was, therefore, not checking for a market reaction
to an environmental signal, as no signal was given to the
market. It was checking for market reactions to firms
which had better pollution control.

Using a Spearman Rank Order Correlation Test, Spicer
found significance at an alpha level of .05 in only 45% of
the tests, and only 6% of the time when checking one of
the risk variables. At an alpha of .10 for the one-tailed
tests the percentages increased to 58% and 25% respectively.
In all cases, however, the signs were in the hypothesized
direction. A Mann-Whitney Test was also run, and yielded
similar results. Spicer then concluded:

Specifically, it was found that, for a

sample drawn from the pulp and paper industry,

companies with better pollution-control records

tend to have higher profitability, larger size,

lower total risk, lower systematic risk and

higher price/earnings ratios than companies

with poorer pollution-control records.

Spicer's conclusions appear justified for profitability,
size, and price/earnings ratios. For the risk variables a
little caution seems in order. Although he got the hypothe-
sized sign in all 16 cases he ran the correlation on one of
the risk variables, it must be remembered that the tests

were redundant in many cases, and the average alpha level

for the tests on risk was only .239 with a high of .480.

 

33Spicer, p. 109.

24
Furthermore an interesting aspect of the association

has not been tested. The question of whether or not the
firms with the best indicators of investment value, as
defined by the research, acquired that position before the
acquisition of good pollution control was not addressed.
There was no control in the study, therefore it is question-
able if the disclosure of the environmental data was at all
related to the market evaluation of the firms, as the title

of the paper would seem to indicate.

Summary

This chapter has presented evidence of interest in
environmental aspects of corporate behavior. Surveys have
indicated that the public was concerned about the deterior-
ating environment. Accountants have responded to this area
of public interest with social audits and attempts to mea-
sure costs. Economic theory has been advanced which indi-
cated that in some cases there are sound economic reasons
for firms to eliminate pollution of the air and water.
Mutual funds have been formed with emphasis on the social
aspects of firms, and have met with mixed success. Share-
holders have taken the previously unheard of step of
challenging management through proxy votes in areas of
social responsibility. Investors have indicated that they
would use environmental data in investing decisions. In
the pulp and paper industry, an association has been shown

to exist between good pollution control records and some

25
indicators of economic well being.

In no case, however, have environmental disclosures
been studied in terms of capital market reaction. This
research will examine whether the environmental disclosures
required by the SEC were associated with statistically sig-
nificant differences in trading volume. The following
chapter will detail the development of SEC environmental
disclosure requirements. Chapter three will explain the
test procedure, and Chapter four will elaborate on the
selection of a sample for testing. Results will be pre-

sented in Chapter five.

CHAPTER II
SECURITIES AND EXCHANGE COMMISSION

Background of SEC Requirements

The SEC has not been a compelling advocate for requiring
environmental disclosures on registrants' reports. In June
of 1971, speaking before the American Society of Corporate
Secretaries in Los Angeles, Chairman William J. Casey said:

I am going to have trouble justifying in my
mind diverting our scarce SEC manpower from its
statutory obligation to protect investors to
kibitzing on the statutory obligation of other
agencies to protect the environment. While I
believe that management must look ahead and
adOpt its policies to the needs of the future,

I take a dim view of efforts to force a corpo-
ration into new directions on a piece by piece
application of social theory.

I have serious doubts about shareholder pro-
posals, which if carried, would force the invest-
ment of a single minority shareholder to be
applied in a way which would not have the pri-
mary purpose of solid, long term economic benefit
impliedly promised when he purchased his shares.1

In formulating requirements for reporting environmental
items to the SEC, the Commission was reacting to two external
pressures. They were pressures brought by environmentalists,
which included court action, and the requirements of the

National Environmental Policy Act of 1969 (NEPA). NEPA

 

1Securitiegand_Exchange Commission News Digest, Issue
71-117, June 17, 1971.

26

27

mandated all federal agencies to include environmental
responsibility among their areas of accountability. In
this aspect the act was unique. The SEC responded by
attempting to correlate environmental considerations with
shareholder needs for economic enhancement. Accordingly,
the SEC has restricted itself to requiring environmental
disclosures which are essentially economic in nature.

Prior to any official statements by the Commission,
The Natural Resources Defense Council, Inc., and the
Project on Corporate Responsibility had requested the
Commission to alter its reporting, registration, and proxy
forms to include disclosures about environmental and civil
rights matters. After the 1971 release discussed below,
the SEC informed the petitioners that it was denying their
request in order to study the disclosures it required with
the 1971 release. The petitioners were not satisfied with
the SEC's response, and the court action has been almost
continuous since then. As the result of the court action
many public hearings have been held, and environmental
disclosure proposals have been made and withdrawn. Essen-
tially the SEC requirements have not changed since the
1971 release which was incorporated into reporting forms
in 1973. The next section reviews the SEC releases on

environmental disclosure.

28

SEC Environmental Pronouncements

 

The SEC first entered the environmental field with a
speech made to the New York Financial Writers Association
by Chairman William J. Casey on June 7, 1971. Discussing
disclosures a company would be required to make in light
of increasing public concern about the environment Mr.
Casey said:

We will require disclosure of any material
litigation against a user under the various air,

water and other antipollution laws. More than

that, in the examination of filings made with

the Commission, we will look to the nature and

character of the business to see if significant

capital outlays are likely to be required in

order to eliminate pollution of streams or

atmosphere or if significant product redesign

seems likely to be called for to meet anti-

pollution standards. The same kind of inquiry

will be made with respect to the impact of safety

standards on a company's product line.2

The first Securities Act Release (SAR 5170) on environ-
mental disclosures was issued on July 19, 1971. (See Table
2-1.) This initial response to growing public concern about
pollution defined the Commission's views on its role in
environmental report requirements as being essentially
economic in nature. This release added to the requirements
for describing a registrant's business. It required the
disclosure of compliance with statutory requirements con-

cerning environmental quality which 1) may necessitate

significant capital outlays, 2) may materially affect the

 

2Securities and Exchange Commission News Digest,
Issue 71-110, June 8, 1971.

29
TABLE 2-1

Chronological List of Securities Act Releases
(SARs) on Environmental Disclosures

July 19, 1971 SAR 5170
Required registrants to disclose effects of compliance
with statutory requirements respecting environmental quality.

February 16, 1972 SAR 5235
Proposed amendments to reporting forms incorporating
disclosure of effects of compliance with statutory require-
ments respecting environmental quality.

April 20, 1973 SAR 5386
Adoption of amendments to reporting forms incorporating
disclosure of effects of compliance with statutory require-
ments respecting environmental quality.

February 11, 1975 SAR 5569
Notice of proceedings for possible expansion of environ-
mental disclosure requirements.

April 4, 1975 SAR 5577
Supplemental information regarding proceedings for
possible expansion of environmental disclosure requirements.

October 14, 1975 SAR 5627
Notice of Commission conclusions and rule-making proposal
for listing of reports of noncompliance with environmental
protection statutes.

December 10, 1975 SAR 5653
Supplemental information regarding request for public
comment on proposed listing rule.

May 6, 1976 SAR 5704
Proposed listing of noncompliance reports withdrawn.

May 18, 1976 SAR 5707
Solicitation of public comments by Advisory Committee
on Corporate Disclosure, issues include SEC requirements on
information regarding environmental matters.

February 15, 1978 SAR 5906
Preliminary response of the Commission to the recom-
mendations of the Advisory Committee on Corporate Disclosures -
no new environmental disclosures needed.

30

earning power of the business, or 3) cause material changes
in the registrant's business done or intended to be done.
Legal proceedings enforcing environmental laws pending or
known to be contemplated and certain matters involving

civil rights also had to be disclosed. The requirement for
disclosure of legal proceedings was nothing new, and neither
it nor the civil rights matters are pertinent to this
research.

SAR 5170 was issued as a clarification or interpreta-
tion of existing requirements, and not as an amendment.
Therefore, it went into effect immediately and should have
been incorporated in 1971 lO-K reports. However, there
was no general reporting of environmental matters as the
result of this release. A few companies responded in
various locations on Form lO-K, e.g. under item 1 descrip-
tion of business, or item 5 legal proceedings. However
most firms made no mention whatsoever of compliance with
statutory requirements. Noting the lack of response, and
still feeling the pressures discussed above, in February
of 1972 the Commission began correcting the deficiencies
of the earlier release.

SAR 5235, released on February 16, 1972, proposed
amendments to forms filed with the Commission which would
formalize the requirements of SAR 5170. The forms to be
affected were Securities Act Forms S-l, S-7, and S-9 and
Exchange Act Forms 10, lO-K and 8-K. The proposal would

require disclosure of the effect of federal, state, and

31
local environmental protection laws and regulations upon
capital expenditures, earnings and competitive position.
Views and comments on the proposed amendments were required
on or before March 28, 1972.

On April 20, 1973 with SAR 5386 the Commission formally
adopted amendments to its reporting forms S-l, S-7, S-9, 10,
10-K and 8-K that would in the opinion of the Commission
jointly promote investor protection and the purposes of
NEPA. The amendments involved both legal proceedings and
the description of a registrant's business. This research
is only concerned with the description of business portion.
The legal proceedings disclosure requirement was not essen-
tially new, since the SEC already required disclosure of
material legal proceedings on 8-Ks. The business descrip-
tion amendment for the lO-K was:

VIII. Item 1(b) of Form 10-K is amended by

adding thereto a new paragraph reading as

follows:

(7) The material effects that compli-
ance with Federal, State and local
provisions which have been enacted

or adopted regulating the discharge
of materials into the environment,

or otherwise relating to the protec-
tion of the environment, may have
upon the capital expenditures, earn-
ings and competitive position of the
registrant and its subsidiaries.

The description of business part of the amendments
swas the same for all forms. Form 10-K was specifically

:shown since it is required annually and in most cases

:represented the first report from a registrant encompassing

32

the environmental disclosures. The amendments were effec-
tive for reports and registration statements filed on or
after July 3, 1973. Therefore, the first 10-K reports
affected for calendar year firms were those for the year
ended on December 31, 1973. (See Figure 2-1.) The require-
ment specified was obviously economic and, therefore was in
keeping with the SEC's avowed purpose of incorporating
environmental considerations required under NEPA with the
Commissionfisprimary responsibility of providing information
which they perceive as being useful to shareholders con-
cerned about economic well-being.

On December 9, 1974 Judge Charles R. Richey ruled in
Natural Resources Defense Council, Inc. versus Securities

3 that the Commission should resolve

and Exchange Commission
two issues. The first was the extent of investor interest
in issues of a social nature, including environmental con-
siderations. The second was what avenues are available to
investors who seek to eliminate practices that are detri-
mental to the environment and equal employment opportunity.
Judge Richey also charged the SEC not to limit itself to
these two questions, but to use its expertise in attacking
the social issues question.

The Commission responded to Judge Richey's order on

February 11, 1975 when it, somewhat reluctantly,4 issued

 

3Natural Resources DefenseOCouncil, Inc., et al., v.
Securities and Exchan e CommiSSion, et al., No. 409-73
(D.D.C., December 9, 974).

4Judge Richey ordered the Commission to take further
rulemaking action in conformity with the procedural

Test Period

Potential Shift

33

FIGURE 2-1

Time Continuum of Critical Events in the
Development of SEC Ecological Reporting

 

 

x - 1971

x —

x - 1972

x - 1973
——-x —

x u—

x - 1974

x

x

 

June 7

July 19 -

Apr.

July

Dec.

Mar.

Apr.

SEC Chairman reveals that SEC
will require disclosure of
significant capital outlays
for the environment.

SEC requires disclosure of
effects of compliance with
statutory requirements on
environmental quality.

Proposed amendments to forms
S-l, S-7, S-9, 10, and lO-K
incorporating requirements of
July 19, 1971.

20 - Amendments to forms enacted.

3 - Amendments to forms become

effective.

31 - End of 1973 calendar year.

23

5

3

Two week trading period sur-
rounding deadline for filing
1973 lO-Ks (March 31).

34

SAR 5569 announcing public proceedings regarding possible
disclosure in filings made with the SEC of corporate envi-
ronmental practices and other social, rather than financial
matters. The Commission was interested in comments from
interested persons regarding possible modification of its
disclosure requirements in light of NEPA, and with regard
to equal employment practices and other matters of social
significance. Written comments were to be submitted prior
to May 14, 1975 and public hearings were scheduled to begin
on April 14, 1975. The Release included a statement of
existing reporting requirements and listed the following
possible additional requirements.

(1) the nature and extent, quantified to the

degree feasible, of the resulting environmental

pollution or injury to natural resources;

(2) the feasibility of reducing such pollution

or injury under existing technology, including a

description of alternatives and the cost of each;

(3) the prospects for improving that technology;

 

requirements of the Administrative Procedure Act, which he
found had not been fully complied with when the Commission's
forms were amended on April 20, 1973, pursuant to NEPA.
While the Commission does not agree with Judge Richey that
it did not satisfy the procedural requirements of the Admin-
istrative Procedure Act, it is herewith attempting fully to
comply with his order.

"The fact that the Commission is conducting these proceed-
ings should not be taken to indicate any view as to its
authority to assist members of the investing public in
matters of primarily social rather than financial concern."
Securities and Exchange Commission, Securities Act of 1933
Release No. 5569, Securities Exchange Act of 1934 Release
No. 11236, February 11, 1975, footnote two.

35

(4) existing and projected expenditures for
reducing such pollution or injury;

(5) legal requirements affecting the impact of
the registrant's activities on the environment,
including requirements for licenses and permits
and outstanding court or administrative orders;
and

(6) pending or threatened judicial or agency
proceedings, whether initiated by private or
governmental bodies, challenging registrant's
compliance with environmental protection standards.

It has further been proposed that the Commission
require disclosure concerning whether a registrant
has changed its products, projects, production
methods, policies, investments or advertising to
advance environmental values and a general state-
ment of the registrant's policy towards environ-
mental issues and concerns.

In SAR 5577 dated April 4, 1975 the Commission
announced that a limited number of copies of SAR 5569 would
be available, upon request, to groups or organizations whose
membership might be interested in commenting on the matters
contained therein.

The SEC's conclusions on the public hearings and further
rulemaking proposals were announced in SAR 5627 issued on
October 14, 1975. The release was a fairly long one in
which the Commission explained the basis for its conclusions.
The SEC stated that its statutory obligation under the '33
and '34 Acts was to provide for the protection of investors:

Specifically, insofar as is relevant here,
the Commission may require disclosure by regis-
trants under the Securities Act and the Secu-

rities Exchange Act if it believes that the

information would be necessary or appropriate
for the protection of investors or the further-
ance of fair, orderly and informed securities
markets or for fair opportunity for corporate
suffrage. Although disclosure requirements may

36

have some indirect effect on corporate conduct,
the Commission may not require disclosure solely
for this purpose.

The release then discussed the relation of NEPA to the
SEC's primary statutory obligation:

NEPA is unique in that Congress, in this
single enactment, supplemented the mandate of
all federal agencies to include consideration
of environmental values within agency respon-
sibility.6

NEPA's effect on the Commission's authority
to require disclosure appears to turn on the
meaning of Section 102(1), which requires the
Commission "to the fullest extent possible" to
interpret and administer the federal securities
laws "in accordance with the policies set forth
in (NEPA)."

...We believe that ... Section 102(1) was
intended to permit and require agencies such
as this Commission to consider environmental
values in the performance of the functions
authorized under their organic statutes.7

The release then explains the reasons why the various
alternatives for environmental reporting were rejected. The
only alternative accepted was a requirement for a regis-
trant to provide a list of its most recently filed environ-
mental compliance reports which indicate that the registrant
has not satisfied within the last twelve months environ-
mental standards established by federal statute. In addi-
tion, the proposed amendments would require registrants to

provide investors copies of the reports for a reasonable

 

5SAR 5627, Section 11(3).

6SAR 5627, Section III(A).

7SAR 5627, Section 111(8).

37
fee upon written request. Also proposed was a requirement
for registrants to estimate and disclose capital expendi-
tures for environmental control purposes for at least the
remaining portion of the current year and the succeeding year.

In SAR 5653 on December 10, 1975 the Commission
announced that it would not extend the comment deadline for
the proposals given in SAR 5627 beyond the announced January
12, 1976 date. There followed SAR 5704 on May 6, 1976 in
which the Commission rejected the proposed listing amend-
ment and accepted the amendment calling for disclosure of
material estimated capital expenditures for environmental
control facilities for the remainder of the current fiscal
year and the succeeding fiscal year, and any further periods
deemed material. The effective date was July 1, 1976.

While the specification of estimates of future expenditures
was new, the reporting of them had in many cases been done
before. (See disclosure examples, Chapter IV.)

SAR's 5707 and 5906 issued on May 18, 1976 and
February 15, 1978 respectively deal with proceedings and
recommendations of the Advisory Committee on Corporate
Disclosure which included on its agenda the disclosure of
environmental matters. The Commission proposed no new
environmental disclosure requirements as the result of the

work of the Committee.

38

Disclosure Requirements & the Research Question

 

The SEC has claimed that investors are interested in
economic data for investing decisions. One result of a
growing public interest in environmental matters was NEPA.
NEPA increased pressure on the Commission for environmental
disclosures in financial statements. Accordingly, the SEC
required registrants to disclose the effects of compliance
with federal, state and local statutory requirements
respecting environmental quality on capital expenditures,
earnings and competitive position. This requirement was
first made on July 19, 1971 and should have been reported
in lO-Ks for 1971. Noting a lack of response, the SEC for-
malized the requirement into an amendment of reporting
forms effective July 3, 1973. The requirements have been
challenged by environmentalists hoping to get the SEC to
enlarge its environmental disclosures.

This has led to two questions. Do the economic envi-
ronmental disclosures required by the SEC in SARs 5170
and 5386 have informational value as recognized by investor
reaction to the signals? WOuld additional environmental
disclosures, which may or may not be economic in nature,
be useful to investors in the capital market? This research
addresses the first question and not the second.

The time frame for testing was selected as the two
week period surrounding the deadline for receipt of the
1973 lO-K reports. (See Figure 2-1.) Receipt of 1973

lO-Ks was the critical event for testing since 1973 lO-Ks

39
represent the largest single block of initial responses to
the SEC requirement. Most lO-Ks are received by the SEC
within one or two days of the filing deadline. The reports
are available for public inspection within three days of
receipt. Thus a two week period surrounding the filing
deadline would be sufficient to make any data in the reports
available to the public through the SEC. Many people check
through SEC material and data is disseminated from the Com-
mission files:
Each year, many thousands of requests for

copies of and information from the public files

of the Commission are received by the Public

Reference Section in Washington, D.C. During

the 1970 fiscal year, 12,496 persons examined

material on file in Washington and several

thousand others examined files in the New York,

Chicago, and other regional offices. More than

31,424 searches were made for information re-

quested by individuals and approximately 13,320

letters were written with respect to information

requested.8

It would not be necessary for every investor to inspect
the files in order to get the data, as large brokers fre-
quently have people check the files and pass the findings
on to customers. The data can also be made available to
the public directly from the firms filing the reports.
Once the report is prepared and sent to the SEC, where it
becomes public information, many firms will supply directly
the data contained in the filing. The exact form of the

test and data collecting technique will be explained in the

next chapters.

 

8Securities and Exchange Commission, Securities and
Exchange Commission Annual Report: 1970.

 

 

CHAPTER III

TEST DESIGN

Test Variable

 

The purpose of this research. as previously stated,
is to examine the relevance of environmental disclosures
in financial statements to individual participants in the
capital market. To the extent environmental disclosures
alter expectations of future cash flows, the disclosures
are of interest to the market in general. The market, in
aggregate, may perceive informational content in data
that individual investors do not. Likewise, a piece of
data might be informative to some individual investors,
and informational neutral to the market in aggregate. The
SEC's required environmental disclosures are economic in
nature and may alter expectations about future cash flows
of the firms making the disclosures. Individual investors
may perceive informational content in the environmental
disclosures for that reason. The SEC's required environ-
mental disclosures may also be informative to the extent
that they reveal firm behavior with regard to protecting
the environment. The degree of the effect on the firm of
complaince with statutes for protecting the environment
may indirectly reveal some aspect of how much the firm

40

41
was damaging the environment. To this extent the disclo-
sures are important to investors who are concerned with
environmental protection in addition to maximizing expected
future cash flows.

This research focuses on individual reactions in the
stock market. These reactions could be caused by the
economic or social aspect of the SEC disclosures. Since
this research is checking for a reaction, and not isolating
reasons for a reaction, the actual motive behind the in-
formative nature of the disclosure is not critical. Indi-
vidual reactions include persuasion, proxy actions and
trading decisions. (See Chapter one.) Of these, trading
decisions are the easiest to test, since they affect market
volume:

An important distinction between the price

and volume tests is that the former reflects

changes in the expectations of the market as a

whole while the latter reflects changes in the

expectations of individual investors. A piece

of information may be neutral in the sense of

not changing the expectations of the market as

a whole but it may greatly alter the expectations

of individuals. In this situation, there would

be no price reaction, but there would be shifts

in portfolio positions reflected in the volume.

Since this study focuses on individual reactions a
volume statistic will be employed. Although not as prev-

alent as price or beta studies there have been some market

based studies performed using volume data. William H.

 

1William H. Beaver, "The Information Content of
Annual Earnings Announcements," Empirical Rgsearch in
Accounting: Selected Studies 1968, pp. 69-70.

 

42
Beaver published a study using volume as a variable in the

1968 supplement to the Journal of Accounting Research

 

(JAR).2 This was followed by a publication by Jack Kiger
in the JAR in 1972,3 and one by George Foster in 1973, also

in the JAR.4 These three studies are reviewed below.

Previous Volume Studies

 

Beaver tested annual earnings announcements for infor-
mational content. He used weekly data with the week the

earnings announcement was made in the Wall Street Journal

 

(WSJ) as the test week. Beaver's test was positive. He
checked to see if investors reacted to the annual earnings
announcements made in the WSJ. He did not attempt a
normative test, which requires the specification of a model
for the expectations of investors and testing to see if the
model properly specifies actual investor actions.

Data for Beaver's study was collected for the years
1961 through 1965 inclusive. There were six criteria a
firm had to meet in order to be included in the research.
(1) The firm had to be included on the Compustat tapes.

(2) The firm had to be a member of the New York Stock

 

2Beaver, pp. 67-92.

3Jack E. Kiger, "An Empirical Investigation of NYSE
Volume and Price Reactions to the Announcement of Quarterly
Earnings," Journal of Accounting Research, 10, No. 1
(Spring 1972), pp. 113-128.

 

4George Foster, "Stock Market Reaction to Estimates of
Earnings per Share by Company Officials," Journal of
Accountinngesearch, 11, No. 1 (Spring 19737, pp. 25-37.

 

 

43
Exchange (NYSE). These two criteria were for ease of data
gathering. (3) The firm had to have a fiscal year different
than the calendar year. This was done to avoid a clustering
of announcement dates since Beaver was interested in cross-
sectional analysis, and Compustat firms are 67% calendar
year firms. (4) No firm with a dividend announcement in the
week of the earnings announcement was included. Also, (5)
no firm which announced a stock split during the seventeen
week period surrounding the earnings announcement date was
included. Without these two exclusions there would have
been alternative explanations for any observed reactions
in the market. Beaver ran a pilot study without excluding
dividend announcements and found the volume reaction to be
approximately double what it was when the announcement firms
were excluded. The seventeen weeks was the period surround-
ing the earnings announcement dates for which market data
was gathered and tested. Finally, (6) only firms with less
than twenty news items a year in the WSJ were included in
the study. This was done to reduce noise. Since the study
compared volume traded in the seventeen weeks surrounding
the earnings announcement with volume traded in the week of
the earnings announcement, other news items announced in
the surrounding seventeen weeks served only to impair the
test. Obviously criterion six was a compromise between
eliminating too many firms from the sample to conduct a
meaningful test and maintaining internal validity.

The net result of this sampling procedure was 143 firms

44

and 506 annual earnings announcements. A firm only needed
to satisfy the criteria for one year in order to be included
in the sample, therefore not every firm in the sample was
included in each of the years 1961 through 1965. The

volume variables used in the study were:

no. of shares of firm i

 

 

 

 

V = traded in week t 1
it x
no. of shares outstanding no. of trading
for firm i in week t days in week t
no. of shares traded for
V = all NYSE firms in week t 1
Mt x
no. of shares outstanding no. of trading
for all NYSE firms days in week t

in week t

Vit is the weekly average of the daily percentage of

shares traded, and VMt is an index reflecting the level of
volume for all NYSE firms. The data was first analyzed
unadjusted for market influences. For each of the 506

annual earnings announcements Vi was computed seventeen

t
times - once for the week of the actual announcement in

the WSJ, and once for each of the eight weeks on each side
of the announcement week. These figures were then averaged
across announcements for the seventeen weeks resulting in
seventeen data points. Analysis of these data points
revealed that mean volume during the week of the announce-

ment was 33% greater than mean volume for the other sixteen

weeks in the study. It also constituted by far the largest

45

value observed during the entire seventeen weeks. Further-
more the upward shift in volume was very dramatic, with
almost all of the above normal activity occurring in the
week of the announcement. This was taken as evidence that
the annual earnings announcement had informational content
without the use of any statistical test.

The analysis was then repeated, adjusted for market
influences. Market wide influences were removed using a

linear regression model:

Vit = a1 + bith + eit

The estimates of ai and bi were made from observations
from the nonannouncement weeks using ordinary least squares.
The average correlation coefficient was low, with a posi-
tive sign for 139 of the firms and negative for only 4
firms. This suggests that although the relation is signifi-
cantly different from zero, the magnitude is quite small.

As expected from the minuteness of the market—wide effects,
the analysis was almost identical to the analysis unadjusted
for market influences. The mean volume during the announce-
ment week was approximately 30% greater than the mean volume
for the other sixteen weeks in the study. It was by far

the largest value observed, with almost all of the above
normal activity occurring in the week of the announcement.
Again, this sudden strong change in volume activity was
taken as evidence for the informational content of the

annual earnings announcement without any statistical testing.

46

The main problems with the Beaver study were that he
did not do any statistical testing and did not employ a
control group. The study did make use of control periods -
the eight weeks on either side of the announcement week.
With cross-sectional data the need for a control group is
reduced since there is no one point in time being tested
for volume shifts. Still the use of a control group would
add strength to the results. The lack of statistical
testing means one cannot tell to what extent the observed
shift in volume can be attributed to mere chance.

Jack Kiger's study was concerned with the informational
content of quarterly earnings announcements. In order to
be included in the study a firm had to be a member of the
NYSE and had to have reported quarterly earnings for the
years 1966 through 1969. Also excluded were firms with
stock split, dividend, or other news announcements near the
date of the interim report. These exclusions allowed Kiger
to more effectively isolate the cause of any shift in
volume his study ascertained. The exclusion of firms with
other news items revealed near the date of the interim
report, like Beaver's exclusion of firms with twenty or
more news items in the year, tended to remove some of the
more prominent or larger NYSE firms from the sample.

In order to minimize the potential for information
leaks actual inclusion in the sample in any period was
based on the proximity of the date of the announcement of

interim earnings to the close of the accounting period.

47

Firms were selected from the earliest five day period in
WSJ listings after the close of the quarter during which
thirty companies met all of the requirements for inclusion
in the study. This had a twofold effect. First, the sample
for each quarter studied was different. The samples were
not completely independent since the factors which resulted
in a firm being in the five day period at the end of one
quarter could very well repeat in other quarters. Never-
theless, although there was some repetition, the quarterly
samples were not comprised of the same firms. Second,
although Kiger does not tell in the article, it is quite
likely that the time lag between the end of the accounting
period and the period of the earnings announcements is not
the same for each quarter being tested. The actual quar-
ters tested were the second and third quarters of 1968 and
the second and third quarters of 1969. No reason was given
for the choice of quarters for the tests.

Two measures were made for testing in the study -
(1) average adjusted trading volume for three days, with
the middle day being the day the earnings announcement was
made in the WSJ; (2) average adjusted trading volume for
five days, again centered around the date the earnings
announcement was made in the WSJ. The adjustment made to
the data were two. First, block shares of over twenty
thousand that were traded were removed from the data.
This was done on the premise that block trades were prob-

ably planned prior to the release of the earnings

48
announcement and did not accurately reflect trading deci-
sions made at the time of the release. Second the data
were adjusted by a market index designed to remove general
market movements. The market index was constructed by
dividing total trading volume of the NYSE on the first day
of the month in which the analysis was made by total mar-
ket sales on each day during the period of analysis. As
a control period Kiger used average adjusted trading volume
for the same firms in the five day period beginning eight
days prior to the announcement of the interim earnings.

Two statistical tests were used to evaluate the data,
the sign test and the Wilcoxon's Matched-Pairs Signed-Rank
Test. Each test was run twice, comparing the control period
average adjusted trading volume with average adjusted
trading volume for the three day test period and the five
day test period. This was done for the second and third
quarters of 1968, the second and third quarters of 1969,
and the total of all four of the above quarters.

With an alpha of .10, results of the sign test were
identical for both the three day and the five day test
period. There were statistically significant differences
in the control period and the test period in the second
quarter of '68, the second quarter of '69, and the total.
With the same alpha level, the Wilcoxon results showed
significance for all but the third quarter of '69 on the
three day test period, and all except the third quarter

of '68 using the five day test period. Although the

49

results were mixed, they tended to substantiate that
quarterly earnings announcements did contain informational
content for investors.

The obvious improvement of the Kiger study over the
Beaver study was the use of statistical testing. The tests
showed only partial significance, while the raw data indi-
cated volume differences between the control and the test
period every time. Like Beaver, Kiger did not employ a
control group. Since his data were temporal, the omission
of a control group is a fair criticism. Any event contig-
uous with the earnings announcements could just as validly
be credited with imparting the information on which the
investors acted. Multiple testing such as Kiger employed
would tend to reduce the possible competing hypotheses,
but would not eliminate them entirely.

George Foster studied stock market reaction to esti-
mates of earnings per share (EPS) which were made by com-
pany officials. In order to study investor reaction Foster
sought out firms where estimates of EPS were made by a com-
pany official after the end of the fiscal year, and before
the release of either preliminary earnings announcements
or audited earnings. Initially he used the WSJ index for
the years 1968 through 1970 to identify firms which had a
company official make an estimate of EPS before the release
of preliminary earnings announcements.

Once identified in the WSJ index a firm had to meet

four criteria in order to actually be included in the

50

sample. (1) The firm had to have a calendar year basis for
reporting. (2) The firm had to be included on the CRSP
tape. These first two criteria were for ease of data
gathering. (3) The firm could not have made a dividend
announcement in the week the EPS estimate was made or the
week of the preliminary earnings announcement. Nor was
the firm allowed to have a stock split announcement in
either the EPS estimate week or the preliminary earnings
announcement week, or any of the sixteen weeks surrounding
the week of either announcement. This was to maintain the
integrity of the event being tested since both dividend
and stock split announcements could cause a volume reac-
tion. (4) The estimate of EPS had to be precise and had
to be made by a company official. Again, this was to in-
sure a concise specification of what was actually being
tested. With this criterion broad range estimates and
estimates made unofficially or by people without inside
access to financial records were eliminated.

This selection process resulted in a sample of sixty-
eight firms. Usually the company official making the EPS
estimate was either the president or the chairman. For a
control group, Foster selected the next firm in the WSJ
index after a sample firm to satisfy criteria one through
three. The variable used was:

number of shares in

 

 

firm i traded in week t 1
Vit = x
number of shares out- number of trading
standing for firm 1 days in week t

in week t

51

Vit was then computed for each of seventeen weeks,
the week of the announcement (either EPS estimate or pre-
liminary earnings), defined as week zero, and the eight
weeks on either side of week zero. For the test group this
procedure was followed twice, first with the week of the
EPS estimate as week zero, and then with the week of the
preliminary earnings announcement as week zero. Since

there was no EPS estimate for the control group, V was

it
only computed surrounding the week of the preliminary
earnings announcement for the control group.

A A review of the raw data showed the greatest average
Vit for any of the seventeen week periods to be in week
zero in all three cases. In addition, for the test group,

average weekly Vi was greater in week zero of the EPS

t
announcement than it was in week zero of the preliminary
earnings announcement. Since EPS was announced before
preliminary earnings this showed that market reaction was
greatest associated with the earliest announcement. A
Kolmogorov-Smirnov One Sample Test was then used. For the
control group the test showed statistically significant
differences in average weekly volume between week zero and
the other sixteen weeks at an alpha level of .01. For the
test group differences between zero week and the other
weeks showed up at an alpha of .01 for the EPS estimate
week, but only at an alpha of .20 for the preliminary

earnings announcement week. As with the raw data, the

tests indicated reaction to both announcements, but the

52
reaction was stronger for the earliest announcement (the
EPS estimate) when there were two announcements. This was
interpreted as showing that EPS estimates by company offi-
cials had informational content for individual participants
in the capital market.

Foster's study, like Beaver's, centered around a zero
week which was not the same for all firms. He also used
control periods around the announcement week, and checked
for increased volume in week zero as compared to the other
weeks. Like Kiger, he used statistical testing to see if
the volume change was likely to be due to chance. Foster
also incorporated a control group into his methodology and
found that for the test group the change in volume during
the later preliminary earnings announcement week was less
significant than for the control group, presumably because
investors in part acquired some of the information received
in a preliminary earnings announcement in the estimate of
EPS. Two things done previously were not repeated in
Foster's study. Unlike either of the two previous works
general market trends were not removed from the data. This
is not surprising since general trends were not shown to be
significant. Large block trades were not removed from the
data in this study as they were in Kiger's. Although no
reason was given for not removing the large blocks, one
can speculate that Foster did not accept Kiger's premise
that large block trades were likely to be planned in advance

and hence not reflect reactions to information received in

53

association with the trading date.

The three studies had commonalities. First they all
examined some aspect of earnings. This feature does not
carry over into this study. The three studies also elimin-
ated from consideration firms which announced stock splits
or dividends during the time frame under consideration.

This was done because the dividend and stock split announce-
ments cause increased trading and would therefore impair

the internal validity of the research. These exclusions
obviously apply to this research as well. Additional con-
siderations revealed in one or more of these three papers
concern control periods, which all three employed, a control
group, used only by Foster, and statistical testing, used

by both Kiger and Foster.

Test Design

 

Specific Volume Variable

 

In all of the above tests the volume variable was com-
puted over a period not to exceed one week or five trading
days. This is consistent with the EMH, which states that
the capital market reacts instantaneously and in an unbiased

fashion to any new information.5 In this case, however, it

 

5Kiger comments that the adjustment is in fact not

instaneous "...Len thening the time period had little effect
on the findings, w ich suggests that without regard to price
changes, instantaneous adjustment does not occur with
respect to individual investors. In fact, the slight dif-
ference between the two measures of trading volume suggests
that increased trading volume ma ‘occur for a period of

time longer than the two days fo lowing the announcement

of quarterly earnings." Kiger, p. 123.

54
is not possible to isolate the week of the environmental
disclosure release from the SEC reporting requirements, and
a two week period had to be utilized. The two week period
was used because most lO-Ks were received by the SEC in
the two week period surrounding the filing deadline, which
came on the weekend for both 1972 and 1973 reports. In the
cited studies the item of interest was a form of earnings
announcement. In this research a disclosure made in con-
junction with an earnings announcement is being tested.
For this reason a volume reaction can be expected during
the period of the disclosure as the result of the earnings
release. To the extent the SEC's required environmental
disclosures alter expectations about future cash flows they
are of interest to the capital market in general. Addition-
ally, the information the disclosures reveal about firm
behavior with regard to protecting the environment will be
of interest to a subset of investors, the ecology conscious
investors. For these reasons the volume variable used is a
change variable from one year to the corresponding period
of the next year. This should allow a smaller absolute
change in volume associated with the SEC environmental dis-
closure to be statistically manifested. It should also
tend to cancel out volume effects associated with any
announcements made in both of the two years, e.g. the earn-

ings announcement. The variable is computed as follows:

55

no. of shares of firm i
traded in two week

 

 

period j in year y l
(l) v; . = x
'J'Y no. of shares outstanding no. of trading
for firm i in two week days in two week
period j in year y period j in year y

Where "j" varies among -1, 0, and l, with two week
period 0 being the period surrounding the filing deadline
for Form lO-K, and periods -1 and 1, respectively, being
the two week period before period 0 and the two week period
immediately after period 0. Year y will be either 1973,
or 1974 corresponding to SEC filings of data for 1972 and

1973 respectively. The change variable is:

*
(2) V. . _ vi,j, 1974 - Vi,j,1973

 

vi,j,1973

v.. thus represents the percentage change in the daily
percentage of shares traded from the corresponding period
in the previous year. As Good Friday falls in the third
week in April in 1973, and in the second week in April in
1974, periods -1 and 0 have 10 trading days in both years
and period 1 has nine. (See Figure 3-1.)

Block trades of twenty or more shares are not elimin-
ated from the data as they were in Kiger's study. Kiger's
basis for removal of the large block trades was that he
felt they represented decisions made prior to the trade,
and therefore prior to the receipt of any information con-

tiguous to the trade. However, in Kiger's case he was

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FIGURE 3
Data Blocks
1973 1974
March 12 m . . m March 11
t . . t
w . . w
th. .th
* - *
w, f ° v = V1,-1,'74 vi,-l,'73 ° 3*
- ' _ * ' - '
i, l, 73 i, l v1’_1’,73 i, l, 74
m . m
t . . t
w . . w
th. .th
March 23 f . f March 22
March 26 m . m March 25
t . t
w . . w
th. .th
f . . f
* - *
V* v = V140,!74 viaog'73
' ° * *
1,0, 73 1:0 V1’0,t73 V1’0,'74
m . . m
t . . t
w . . w
th. .th
April 6 f . . f April 5
April 9 m . . m April 8
t . . t
w 0 0 w
th. .th
f . v* _ v* (Good Friday)
v* v _ 1,+1,' 74 1,+1, '73 w,
v " * :
i,+l, 73 i,+l vi’+1’,73 i,+l, 74
m 0 O m
t O O t
w 0 0 w
April 19 th. .th
(Good Friday) . f April 19

 

57

working with test periods of as short as three days.

Foster did not repeat Kiger's procedure and he used weekly
trading with a minimum of four trading days if there was a
holiday. In this study two week periods are used with a
minimum of nine trading days in any period. Thus some of
the basis for the exclusion of block trades is not present
even if one accepts the basic premise that block trades are
planned in advance. Furthermore, it seems illogical to
assert that the market reacts instantaneously to any new
information (EMH) and from this assertion test for a change
in volume associated with the release of data to determine
if the data signal has informational content; and then to
eliminate a portion of the market's volume activity on the
basis that it represents a delayed reaction. In addition
many potential users of environmental data are organizations,
like the Church of Christ, and large organizations are
likely to deal in large blocks. Thus if large block trades
were eliminated a valuable portion of the market reaction

might be removed from the study.

Test

 

In the following chapter on sample selection the pro-
cedure for isolating the environmental disclosure from other
disclosures that might lead to a volume reaction will be
amplified. The sample selection leads to three distinct
groups:

1. Those firms which reported the effects of compli-

ance with environment protection statutes prior
to 1972.

58

2. Those firms which reported the effects of
compliance with environment protection
statutes beginning with 1973 lO-Ks.

3. Those firms which made no disclosure of the
effects of compliance with environment pro-
tection statutes through 1973 reports.

Group two is the group of interest, or the test group.
Groups one and three are control groups. The three groups
will be tested over three periods, the test period (period
0) which is the two week period surrounding receipt of the
lO-K by the SEC, and both of the two week periods on either
side of the test period (periods -1 and l), which will
serve as control periods. Period -1 will be tested first
to determine if there is any difference in the three sample
groups in the percentage change in the daily percentage of
shares traded from the two week period prior to the receipt
of the Form lO-Ks from 1972 to 1973. Due to the speed of
volume responses ascertained in previous studies no signifi-
cant differences are anticipated for this time frame. The
same test will then be run for periods 0 and 1. If the
tests are able to pick up differences in the random vari-
able, it is expected, a priori, that these differences will
exist only in the two week period surrounding receipt of
the forms by the SEC.

The nonparametric Kruskal-Wallis Test is employed in
this study. This test uses a ranking over the sample vari-
ables in the period being tested. The smallest value in

each period is assigned the rank of l, and rankings continue

all the way to N, the total number of variables being

59
ranked, which in this case is equal to the total number of
firms in the study. Average ranks are assigned to ties,
but since the variable being ranked is continuous from
minus one to plus infinity ties are not expected to be a

factor. The test statistic is computed as follows:

Rk = Xi R(Vi,j,k)
Where "k" refers to the sample group (one, two,
or three), and R(v. k) is the rank assigned

1rjr
to v. .
i,j,k

It follows that Rk is the sum of the ranks assigned

to group k. The test statistic is:

R2
_ 12 k _
T ’ N (n+1) 5k nk 3 (N+1)

Where nk refers to the number of firms in
group k.

T m X2 (T approximates a chi-square dis-
K'l tribution with K-l, in this case,
two, degrees of freedom.)

The hypotheses to be tested are:

Assumptions:

1. The samples are independent.

2. The random variables are continuous (some
ties are allowed).

3. The measurement scale is at least ordinal.

60

The null hypothesis simply states that the average
ranks of the three groups are expected to be equal, or
that all the k population distribution functions are iden-
tical. The alternative hypothesis is a denial of the null,
at least one of the populations tend to yield larger ob-
servations than at least one of the other populations.
Obviously, if the null is denied it would be of interest
to know which of the groups were not the same. If all
three are the same for the two control periods but not
the test period, then different interpretations can be made
of the results depending on which groups differ, and which
groups, if any, do not differ.

The decision rule is to reject H0 at the level a if T
exceeds the l - a quantile of a chi-square random variable
with K - 1 degrees of freedom. The chi-square approxima-
tion results in a conservative test, meaning that the true
level of significance is smaller than the stated level of
significance associated with the chi-square distribution.
However, the approximation is quite good even if the sample
sizes are small.

Should the null hypothesis be rejected, Scheffe’ post
hoc comparisons will be employed to isolate where the null
failed. The advantage of the Scheffe’technique is that it
accepts unequal cell sizes. Confidence intervals for the
technique are constructed as follows. First contrasts of

interest are drawn up. The simple contrasts are:

61

The complex contrasts are:

W =R1-'(35 (R2+R

4
W5 = R2 - (35 (R1 + R3)

The actual confidence intervals for the contrasts are:

w. a (x§_1 (1-an15 (Var(win£5

 

1
Where Var(W ) = N(N+1) Z afi
i ——r§" k nk

Where "a" is the weight assigned to the
mean rank of group k in the contrast.
Ninety percent confidence intervals will be used with

the Scheffe’ technique as needed.

Summary

The signal this research is examining is the reporting

of the effects of compliance with environment protection
statutes in 1973 10-Ks. If that signal can be associated
with statistically significant volume reactions in the
capital market, it will be said to possess informational
content. The volume variable being tested is the percent-

age change in the daily percentage of shares traded from

62

the date of the receipt of the 10-K for 1972 by the
SEC to the date of the receipt of the 10-K for 1973 by the
SEC. Therefore data will be gathered from both periods.
Three groups are segregated for testing. The test group
consists of those firms initiating the disclosure in the
1973 lO-K. The two control groups are those firms that
began the disclosure prior to 1972, and those firms that
had not as of 1973 lO-Ks made the disclosure.

The test consists of two control periods surrounding
the test period when the lO-Ks were received. The actual
test is the nonparametric Kruskal-Wallis Test with Scheffe’
post hoc ninety percent confidence intervals. The post hoc
procedures will isolate the difference which show up in the
Kruskal-Wallis Test and facilitate interpretation of the

results.

CHAPTER IV

SAMPLE SELECTION

Initial Sample

 

The objective of the sample selecting process was to
isolate a group of firms which made initial disclosures
conforming to the SEC requirement for reporting the effects
of compliance with environmental quality statutes in a
period of time small enough for effective testing. This
group would be the test group. Other firms would be desig-
nated as control groups. The first control group would be
those firms which had previously been reporting the statu-
tory compliance effects. The second control group would
be other firms, specifically those which, as of the test
period, had not made disclosure of the statutory compliance
effects. The problems the SEC had with this disclosure
requirement facilitated the sample selecting process.

(See Chapter two for a more complete discussion of the SEC
requirements.) Securities Act Release No. 5170 in 1971
induced some firms to make the desired disclosures, but
many did not. The SEC then altered reporting forms to
incorporate the requirement for reporting the effects of
compliance with statutes respecting environmental quality.
This was done with Securities Act Release No. 5386 on

63

64
April 20, 1973. The Form 10-K which is used for annual
reports to the SEC is the form on which most firms respond-
ing to Release No. 5386 would have made their initial dis-
closure to the SEC. This would have occurred near the end
of March in 1974, with data being reported for the 1973
calendar year. Firms which began reporting in 1971 in
response to Release No. 5170 would form the group which
began reporting the effects of compliance to statutes for
protecting the environment prior to the test period sur-
rounding the end of March in 1974. Subsequent checking of
disclosures revealed some firms still did not respond to
the disclosure requirement in lO-Ks for 1973, and this
group of firms formed the third group for test purposes.

In addition to SEC reports, firms may have made initial
disclosure of the effects of compliance with statutes on
environmental quality in the annual reports to stockholders.
Therefore, it was also necessary to check annual reports in
the sample selection. The initial sample was taken from a

list of firms surveyed by Accounting Trends & Techniques

 

(ATT) for the years 1969 through 1973. This was done in
order to utilize summary data sheets from ATT which identi-
fied firms making disclosures. The choice of 1969 as the
beginning point for the search of annual reports was
arbitrary. 1969 was before the SEC requirement came out,
and in the period when ecology maintenance was becoming

an area of national interest. The summary data sheets

were spot checked against annual reports on hand in the

65
library. ATT altered their categorization of environmental
disclosures in 1971 to more closely correspond to the SEC
requirements, and it was found that the summary data sheets
for 1969 and 1970 were not useful. At this time the sample
was enlarged to include firms surveyed by ATT for the years
1971 through 1973, when the summary data sheets proved
useful. There were 364 calendar year firms surveyed by ATT
for 1971 through 1973. The annual reports for these firms
in 1969 and 1970 were checked individually.

Next micro-fiche copies of annual lO-K reports
beginning with the year ending on December 31, 1970 were
individually checked for disclosure of the effects on the
firm of compliance with statutory requirements concerning
environmental quality. 1970 was chosen as the year to
begin the search since it represents the year just prior
to the initial requirement of environmental statute compli-
ance effect reporting by the SEC. Subsequent analysis
revealed that few firms began reporting the effects in
1971. The single year in which the largest number of firms
began reporting the effects was 1973. This was the year in
which forms were altered to facilitate the reporting. The
period when 1973 lO-K reports were received was selected
as the test period corresponding to the critical event of
the SEC's altering forms for environmental statute compli-

ance effect reporting.

66

Disclosure Samples

It was necessary to categorize disclosures for test
purposes. The desired disclosure addressed the effect of
compliance with federal, state and local statutes concern-
ing environmental quality. The disclosures made on lO-Ks
were more concise than those found in annual reports to
stockholders. Some annual report statements on environ-
mental aspects of the company did not directly reveal the
effects of environmental statute compliance. For example,
occasionally a firm would say in its annual report that it
was conducting an environmental study, or that it was
forming a committee on environmental matters. Neither of
these statements were taken as addressing the compliance

effect question.

The lO-K disclosures usually focused on the effects of
compliance with environmental statutes. The most frequent
form was either a statement of the materiality of the effect
on the firm (see lO-K disclosure example no. 2), or an indi-
cation of the monetary effect of compliance (see 10-K example
4). A few lO-K disclosures were thrown out as they responded
to the requirement by indicating the data requested was not
applicable to the firm (lo-K examples 1 & 3). There were
only two or three of these, and it was felt that they repre-
sented a different signal to the market than the other dis-
closures. For that reason they were not included in the study.
Below are examples of disclosures distinguished as to whether

they were found in lO-Ks or annual reports to stockholders.

67

Disclosures from Annual Reports to Stockholders

1) United States Gypsum Company, 1970, p. 15 (Included
in the test)

Pollution control involves extensive installations
made by U.S.G. at its plants. As early as 1929 the Com-
pany began purifying air emissions at its operating loca-
tions, and has been correcting water pollution problems
for the past years. No U.S.G. plant is built without a
thorough study of possible air and water contamination
and employing the latest technology available to control
emissions.

Experts correlate all anti-pollution activities,
meeting with governmental agencies concerned with pollu-
tion problems and studying technical advances in equipment.
Consulting engineers are employed to develop methods of
control and to assist plant managers in administering a
stringent program of correction and inspection.

Since 1965, some 45 pollution control installations
have been made at U.S.G. plants. The cost of such equip-
ment in the last three years has exceeded $5 million.

A.P. Green Refractories Co. maintains a full-time
antipollution department, believed to be the first in
the refractories industry. Pollution control equipment
is now being engineered or installed in six of Green's
manufacturing divisions. Included are electrostatic
precipitators, cyclone dust collectors, bag type
collectors, wet scrubbers, settling chambers, after-
burners and noise abatement equipment. An in-plant dust
sampling program is being developed jointly by Green and
U.S.G. divisions.

Both U.S.G. and A.P. Green have undertaken positive
steps in another aspect of environmental protection -
land reclamation of quarry areas following extraction of
mineral deposits. By planning reclamation, quarry sites
can be restored to a useful and scenic condition.

2) Pfizer, 1971, p. 21 (Included in the test)

THE ENVIRONMENT. New, advanced technology in pollu-
tion control was a subject of intense study and action
at Pfizer plants throughout the world in 1971. In the
United States approximately 10 per cent of total capital
expenditures was committed to improving further the Com-
pany's performance in controlling emissions and wastes
arising from the production of its products. At Pfizer
International's ten basic manufacturing locations abroad,
increasing emphasis is being placed on improving systems
to minimize the effects of waste disposal on the envi-

ronment through enlightened and appropriate measures for
dealing with the complex problem.

68

3) The Goodyear Tire & Rubber Company, 1970, p. 33
(Included in the test)

Environment - 1970
Challenge, Committment,
Progress

By the end of 1970, Goodyear had committed over $12 million
to environmental control projects since 1966.

Antipollution projects have been completed or initi-
ated at 13 older domestic plants, and newly built plants
are designed to meet high standards of environmental
control.

Goodyear's ecological concern goes beyond corporate
boundaries. This is reflected in Board Chairman Russell
DeYoung's heading the Rubber Sub-Council of the National
Industrial Pollution Control Council. He was named to
this post by President Nixon.

Some dramatic accomplishments in 1970 include the
pilot use of scrap tires to produce carbon black. The
process - pioneered by the Cities Service Company in co-
operation with Goodyear - offers a key to old tire dis-
posal. However, there are economic problems that have to
be solved, including the cost of collecting and processing
the tires.

WOrk is under way on an Akron chemical project that
will cap objectionable fumes and wring marketable sulfur
from them.

Major water treatment projects are completed or under
way in Akron; Gadsden, Ala.; Houston, Tex.; Beaumont, Tex.;
and Point Pleasant, W.Va.

Air-cleaning systems are being installed at Jackson,
Lansing and Ypsilanti, Mich.; Niagara Falls, N.Y.; Cumber-
land, Md.; Jackson, Ohio, and Conshohocken, Pa.

Goodyear Research is accelerating product recycling
work and efforts to develop new environmental control
devices and processes. _

Finally, a number of Goodyear products are finding
antipollution applications, such as huge rubberized
Pillow tanks used for auxiliary sewage systems and as
floating containers to siphon oil from disabled ships.

4) Allegheny Ludlum, 1969, p. 17 (Included in the test)

Concern for Environment at all A-L plants

In keeping with Allegheny Ludlum's concern for its
neighbors and for the quality of the total environment,
new equipment for improving the quality of water and air
continues to be installed - at substantial cost. Of
anticipated capital spending throughout the Corporation,

it
fac
mo‘

 

H

 

69

it is estimated that almost 10 per cent will go for
facilities for controlling the quality of water and air
moving through the plants in the next two years.

5) Alan WOod Steel Company, 1970 (Not included in the
test because the stock is traded on the American
Exchange instead of the New York Stock Exchange.)

p. 2 (From the President's Letter)

Control of air and water pollution continued to
receive a great deal of time and attention from your
management in 1970. During the year much was accom-
plished in the planning and implementing of necessary
controls. Our projected expenditures through 1974 now
include over $5,000,000 for new or improved facilities
for environmental control, and this amount will no doubt
be increased as more technology is developed to meet the
problems. We are aware of our responsibility to our
neighbors and intend to meet or exceed all established
regulations for environmental control.

p. 11 (Under Operations)

High on the list of priorities for 1970 was environ-
mental control. Alan Wood responded rapidly to growing
public concern by accelerating its long-standing program
of environmental improvement. Approximately $1,250,000
was appropriated for construction of a new water treat-
ment plant at the blast furnaces, and three contracts
totalling $454,000 were let for cleaning devices at the
BOF. In 1971 efforts are being concentrated on control
measures in our coke plant. The training department
turned its attention to making our employees aware of the
vital part they can play in environmental control, and an
ongoing program of research and development is underway
at the coke plant. A pilot scrubber program to control
emissions from the sinter plant was completed shortly
before year-end with encouraging results.

6) Alpha Portland Cement Company, 1970, p. 4 (From the
President's letter; Included in the test)

Capital expenditures in 1970 were again kept to a
relatively low level, but our continuing efforts to comply
with air pollution standards at the Jamesville and Birming-
ham plants will require the expenditure of about $2 million
between now and 1973.

not
tra

Its

mer
its
tix

(H

n

...

s-jvan'f-fdn

 

 

70

Disclosures from lO-Ks filed with the SEC

1) La Maur Inc., 1973, p. 2 (Not included in the test
as it was one of three which indicated that the
item was not applicable - in this particular case
it was not possible to tell if the item was not
applicable or not material)

1 b (2) (3) (5) (7) (9) - The information requested is
not applicable or material to an understanding of Regis-
trant's business.

2) Sterling Drug Inc., 1973, p. 2 (included in the test)
Item 1 - Business

The Registrant believes that compliance with environ-
mental regulations will not have a material effect upon
its program of capital expenditures, earnings or competi-
tive position.

3) Zenith Radio Corporation, 1973 (Not included in the
test as it was one of three that indicated that the
item was not applicable)

1 b 7 - Not applicable.

4) Sundstrand Corporation, 1973, p. 6 (Included in the test)
1 Business - Regulations

Registrant believes its facilities comply with appli-
cable emission control regulations. While Registrant does
not believe that continuing compliance with such regula-
tions will have a material effect On its competitive posi-
tion, capital expenditures and other expenses may be re-
quired. In 1972 and 1973, Registrant spent approximately
$3 million at its steel foundry located in Milwaukee,
Wisconsin in order to comply with such regulations.

5) Koppers Co., Inc., 1971, pp. 3-4 (Included in the test)
Item 1 - Business

Environmental Pollution Regulation

The Company is subject to regulation with regard to
environmental quality, including air and water quality,

71

by various Federal, State and local authorities. The
Company cannot accurately forecast the long-term effects
of present and future regulations upon its existing and
proposed facilities and operations. During 1971, in-
vestments in pollution control equipment were about 13%

of the Company's total 1971 capital expenditures. At

year end, projects were under way at 71 plants to enable
those facilities to meet air and water quality standards.
Based on present regulations, 10 to 15% of the Company's
capital expenditures during 1972 are expected to be
devoted to pollution control facilities. Although environ-
mental regulations have not yet had a material adverse
effect on operations, future government action may require
the Company to modify, supplement, replace or abandon
equipment and facilities and may delay or impede con-
struction and operation of new facilities at costs which
could be substantial.

6) Harsco Corporation, 1973, p. 2 (Included in the test)
1 b 7

The company has become subject, as have others, to
more stringent air and water quality control legislation
at the Federal, State and local levels. In general,
Harsco has not experienced substantial difficulty in
complying with these environmental regulations in the
past and believes that they have not had a material
adverse effect on capital expenditures, earnings and
the competitive position of the Company.

7) General Refractories Co., 1971, pp. 9-10 (Included
in the test)

1 Business
Recent Developments

The Registrant is presently studying the material
effects which compliance with applicable federal, state
and local provisions relating to the protection of the
environment will have on the Registrant's business.
During 1971, the Registrant charged approximately
$2,000,000 against income, in connection with land
reclamation and pollution control studies. The Regis-
trant anticipates that additional charges for such items
in presently undetermined amounts, will be required in
future years. Such expenditures will reduce the Regis-
trant's future earnings, although its competitive posi-
tion may be largely unaffected, since the Registrant's
primary competitors will presumably be faced with similar

ex:
pOS
thr
cor

 

<'r+rr1=?

 

 

72

expenditures. The Registrant is currently studying the
possibility of profitably utilizing materials reclaimed
through, and new products generated by, its pollution
control efforts.

8) Fansteel Inc., 1973, p. l (Included in the test)

1 b 7

Fansteel has taken steps to conform with all environ-
mental standards which are defined. Expenditures related
to compliance with federal, state and local provisions
which have been enacted or adopted regulating the dis-
charge of materials into the environment, or otherwise
relating to the protection of the environment, have not
had and are not expected to have a material effect on
capital expenditures, earnings, and competitive position.

9) Easco Corporation, 1972, p. 9 (Not included in the
test since the initial disclosure was made in 1972)

Item 3 - Properties
Environmental Controls

New laws and regulations and increased governmental
action to enforce existing laws and regulations relating
to environmental controls have affected some of the above
manufacturing facilities. At the forging facility in
Springfield, Massachusetts, following a citation by the
State of Massachusetts, the Moore Company engaged-in
engineering surveys at a cost of approximately $12,500
in 1972, and will expend approximately $300,000 in 1973
for improvements necessary for compliance with certain
water and air pollution standards.

10) Sears Industries Inc., 1973 (Not included in the
test because the stock is traded on the American
Exchange instead of the New York Stock Exchange)

Item 1 - Business
p. 4 (Under The Consolidated Laundries Division)

Consolidated does not have, or anticipate, any
material problems complying with Federal, State and local
provisions which have been enacted or adopted, regulating
the discharge of materials into the environment, or other-
wise relating to the protection of the environment.

'0

mal

reg
me]

11

It

 

 

 

73
p. 6 (Under The Highlander Division)

The Highlander Division does not anticipate any
material problems complying with Federal, State and
Local provisions which have been enacted or adopted,
regulating the discharge of materials into the environ-
ment, or otherwise relating to the protection of the
environment.

11) Carborundum Co., 1971, p. 2 (Included in the test)
Item 1 - Business

The amount spent on capital projects during the last
fiscal year with respect to compliance with statutory
requirements concerning environmental quality, e.g.,
various air, water and other antipollution laws, is not
considered material. The amount programmed to be spent
during 1972 is approximately 2.3 million dollars which
is slightly higher than in previous years but will not
materially affect the earning power of the business or
cause material changes in the Company's business done or
intended to be done.

12) Bliss & Laughlin Industries Inc., 1973, p. 4
(Included in the test)

1 b 7

Compliance with current Federal, State and local
regulations relative to the protection of the environment
has not had and is not expected to have a material effect
on the capital expenditures, earnings or competitive posi-
tion of the company.

13) Allied Chemical Corporation, 1970, p. 5 (Included
in the test)

Pollution Control

In 1970 the Company expended about $6,000,000 on
pollution control installations and estimates that it will
spend about $40,000,000 on additional pollution control
installations in the three year period starting in 1971.

ref

pre

eli

StC

fir

mo:

Thj

CI:

the

th«

118‘

of

th

74

Sample Refinement

 

Once the initial sample was selected, it had to be
refined. The only two refinements made by all three
previous studies which used volume as a variable were the
elimination of firms with a dividend announcement or a
stock split in the period for which the test was run. The
first study (Beaver) also excluded firms with twenty or
more news announcements in the WSJ for the previous year.
This criterion has not been subsequently used. The major
criticism of its use has been that it tended to eliminate
the larger firms from the sample thus creating a bias for
the smaller companies. Also, there is no evidence that a
news announcement, per se, affects market volume. The loss
of the large firms has been judged as a greater loss than
the potential of reaction to the WSJ news announcements.

This study started out with 364 firms. These were
calendar year firms surveyed by ATT for 1971-1973 inclu-
sive. General refinements were made to the sample to com-
pletely separate the sample into the desired three cate-
gories. Other refinements were made to eliminate firms
with other possible causes of a volume shift for the
periods surrounding receipt of either the 1972 or 1973
lO-K. Table 4-1 shows the results of the sample refining
process. All the refinements anticipated for this research
are discussed below. Some of the points were not actually
used to eliminate any firms. This does not necessarily mean

that they did not occur in the 364 firms. Once a firm was

Elimi

 

 

75
TABLE 4-1

SAMPLE REFINEMENT

Eliminations:

1. Isolated disclosure in annual report.

2. Declared dividend in six week period
surrounding receipt of 10-K for 1972 or 1973.

3. Traded on American Exchange .

4. Initial disclosure in 1972 annual report

oerR. .

5. Data not available in Commercial and
Financial Chronicle, or Financial World .

6. Stock split during six week period

 

 

surrounding receipt of 10-K for 1972 or 1973.

7. Initial disclosure on 1973 annual report,
or both 1973 annual report and lO-K .

8. Initial disclosure on other reports to
SEC, received between 1972 lO-K and 1973 lO-K .

9. lO-K received outside of two week period

surrounding deadline for 1972 or 1973 . . .

10. Three or more 8-K disclosures of pollution

litigation prior to lO-K disclosure for 1973.

11. other 0 O 0

Total Eliminations .

Ending Sample:

Group 1 O O O O O O O O O O O O O O O O 64
Group 2 O O O O O O O O O O O O O O O O 28
Group 3 C O O O O O O O O O O O O O O O 46

Total Sample.

1971-1973 ATT Calendar

Year Firms.

64

47

20

l7

l7

13

13

12

I"
w
on

U
0‘
b

elii
che
fir
ate
for

not

stL'
she
yea
use
qu
te<
Se‘
cl:

re

tw
ef
er

t}

 

 

76
eliminated from the sample for one reason, it was not
checked against other criteria. In general, firms were
first categorized into one of the three groups, or elimin-
ated as not fitting the categories. Then firms were checked
for other causes of volume reactions. This sequence was
not followed 100% of the time, however.

Due to the nature of the change variable used in the
study, the percent change in the daily percentage of
shares traded from the corresponding period in the previous
year, a group of firms had no niche in the three groups
used for test purposes. If a firm made its initial disclo-
sure of the effects of compliance with environmental pro-
tection statutes in its 1972 reports, it had to be excluded.
Seventeen firms were eliminated because their initial dis-
closure was in either the 1972 lO-K or the 1972 annual
report to stockholders.

Certain refinements had to be made for firms in group
two, those that made their initial disclosures of the
effects of compliance with statutory regulations about
environmental quality in 1973 reports, in order to insure
that the initial disclosure was in fact made with the 1973
lO-K report. Three criteria were applied to this group.
First, those firms which made the initial disclosure in
1973, but made it in the annual report to stockholders,
or in both the 10-K and the annual report to stockholders
were eliminated since the disclosure was not contemporaneous

with the straight 10-K disclosure. This resulted in the

de.
ma:
fi
we
19
c1
su
we

th

pr

re
i1

01

Drd

 

77

deletion of thirteen firms. Secondly, those firms which
made the initial environmental disclosure in other Forms
filed with the SEC which were received prior to the lO-K
were excluded. Since SAR No. 5386 took effect on July 3,
1973, other reports filed after that date which also in-
cluded the environmental statute compliance effects disclo-
sure could have preceded the lO-K. (See Figure 2-1) There
were twelve firms in this group. Finally, firms which had
three or more pollution litigation cases filed in Form 8-Ks
prior to the lO-K were eliminated. It was felt that the
8-Ks might have foreshadowed part of the 10-K disclosure.
Only three firms were affected by this criterion.

There were cases of isolated disclosures on annual
reports to stockholders. These sixty-four firms were not
included in the sample. When firms made the disclosures
on lO-Ks, they continued the disclosure into the future.
Frequently if the disclosure was begun on the report to
stockholders, it was also continued either on the lO-K, or
on the annual stockholder report, or both. Sometimes, how-
ever, a firm would make the disclosure for one year on the
stockholder report and it would not be continued into the
following year. When continuation was not in effect by
1971, the firm was eliminated because of the isolated
disclosure.

Twenty firms were eliminated because they were traded
on the American Stock Exchange. Originally, the sample was

not confined to NYSE firms. However, there were only

twer
WEI!
ms:
not
933
WOI‘

on

the
6?}
thl
s it
we
di
me

WE

 

78
twenty firms that were not NYSE, and at least half of these

were not included in the data sources. Another seventeen
NYSE firms were eliminated because their volume data were

not included in Financial World or Commercial and Financial

 

 

Chronicle. Data on stock outstanding came from Financial

 

Wgrlg. Commercial and Financial Chronicle provided data
on shares traded and dividend announcements.

Two disclosure problems which led to elimination were
the unclear disclosure and the "not applicable". "Not
applicables" were eliminated because there were so few of
them (two or three), and they were a different type of
signal than the other disclosures. Unclear disclosures
were questionable as to whether or not they had in fact
disclosed the effects of compliance with statutory require-
ments regarding environmental quality. Fortunately, there
were very few unclear disclosures either.

Several selection criteria were applied to the six
week period surrounding the deadline for receipt of the
10-K for both 1972 and 1973. The most important of these
were the dividend announcements and stock splits. Previous
studies had shown that these were associated with a volume
reaction in the stock market. Forty-seven firms were elim-
inated because they made a dividend announcement in one or
both of the six week periods surrounding the lO-K receipt
for 1972 or 1973. An additional thirteen firms were elim-
inated because of stock splits. These thirteen included

firms which had a shift in outstanding stock of 10% or more

from

10-1
reel
tes
sam

wit

be
ca:
li

an

 

 

79
from the 1972 receipt period to the 1973 receipt period.

The test was designed around an environmental signal
in the two weeks surrounding the deadline for filing of
lO-Ks for 1972 and 1973. Obviously, if the lO-K was not
received in that time frame for one of the two years, the
test is invalid. Four firms were eliminated from the
sample because their lO-Ks were not received by the SEC
within the designated two week period for 1972 or 1973.

There were two a priori standards which were found to
be ineffective. The first of these was a change in signifi-
cant ownership. This could have affected the pool of stock
likely to be traded. The second criterion was a merger or
announced merger. Both of these criteria were applied for
1972 and 1973 time frames. Neither resulted in firm elim-
inations. (Significant ownership is reported in the lO-K)

Other events which led to the elimination of firms
from the sample include amended lO-Ks for 1972 or 1973
reporting the environmental compliance effects, financial
problems by the firm in the time of the tests, and unavail-
ability of lO-Ks on micro-fiche at Michigan State University
or the University of Michigan. None of these resulted in

more than two firms being removed from the sample.

The Sample
The sampling process resulted in a sample of 138 firms
divided into three groups as follows:

1. Those firms which reported the effects of
compliance with environmental protection

SE

1(

SC

 

 

80

statutes prior to 1972 and continued disclo-
sure thereafter - 64 firms.

2. Those firms which reported the effects of
compliance with environmental protection
statutes beginning with 1973 lO-Ks - 28 firms.

3. Those firms which made no disclosure of the
effects of compliance with environmental pro-
tection statutes through 1973 - 46 firms.

The second group is the test group, with the other two
serving as control groups. A spot check was made on later
lO-Ks for some firms in group three, and it revealed that
some of them reported in later years the effects of compli-
ance. Some of the later disclosures were applicable to
1973, for example, when a firm listed in its 1974 10-K the
money spent over the last few years to comply. In general,
however, no claim is made about the firms in group three
except that they were other ATT firms, subject to the
refinements in the selection process.

Although group two is the smallest group in the sample,
it represents the time-frame when the largest number of new
firms began making the disclosures. Group two is suffi-
ciently large for the statistical testing procedure, which
is in fact used when sample sizes are in excess of five.1

Due to the sample sizes, insividual industry compari-
sons are not feasible, however over 91% of each sample group

is composed of manufacturing firms according to SIC Codes,

with most of the rest classified in wholesale and retail

 

1W. J. Conover, Practical Nonparametric Statistics,
p. 258.

tra
OnI
in
91"
di
vo

CC

 

 

81
trade. There were firty-eight industries represented.
Only one industry reached double digit size. That industry,
iron and steel, was represented by thirteen firms, four in
group two and nine in group one. Due to the wide industry
divergence, no systematic industry bias is likely. Previous
volume research has not used industry classification. For a
complete list of firms in each group and their industry

classification see Appendix I.

CHAPTER V

RESULTS

The Kruskal-Wallis Test

 

Trading volume data were gathered from Commercial and

 

Financial Chronicle. Data on shares outstanding came from

 

Financial World. The volume change variable, vi j' com-
I

 

puted from the data, is bordered by -1 on the lower end,
and unrestricted on the upper end. Variables between zero
and minus one indicate a reduction in volume from the
previous year.

The market, in general, experienced a decline in volume
in the test period and control period two from 1973 to 1974.
For control period one volume was almost stationary over the
two years. The sample reflected this general volume trend,
with slightly more than half the firms showing decreases.
vi,j was computed for the 138 firms in each of the
three periods. The change variable was then ranked from 1
to 138 over all firms in each period. The highest positive

v in each period received the rank of "l", and the most

i,j

negative vi j was ranked "138".
I

The three groups segregated for test purposes were:

1. Those firms which reported the effects of
compliance with environmental protection
statutes prior to 1972 reports.

82

gr

fr

ea

gr

DC

('9'

P6-

 

 

83
2. Those firms which reported the effects of
compliance with environmental protection
statutes beginning with 1973 lO-Ks.
3. Those firms which made no disclosure of
the effects of compliance with environmental
protection statutes through 1973 lO-Ks.

Group two is the primary test group, since it is the
group initiating the compliance effect signal in the time
frame of the statistical tests. The ranks were tested in
each of the periods to see if they differed for the three
groups. The hypothesis to be tested each period under the

nonparametric Kruskal-Wallis Test is:

The null hypothesis states that the mean ranks, in

terms of vi,j'

groups. A more general statement of the null is that all

are expected to be equal for the three

three Vi,j distribution functions are equal. The alterna-
tive is that at least one of the three populations tends

to yield larger observations than at least one of the other
populations. The ranks for each period are separated by
groups and tested using the following statistic:

2
12 Rk

T = m 2k nk ‘ 3(N'l'l)

 

T approximates a chi-square distribution with two
degrees of freedom for three groups. The decision rule was

to reject H0 in favor of H1 at the level alpha if T exceeded

84

the one minus alpha quantile of a chi-square random vari-
able with two degrees of freedom. "N" is the total sample,
138 firms. "Ri" is the square of the sum of the ranks for
group "k". "nk" is the number of firms in the respective
groups: 64 for control group one, 28 for the test group,
and 46 for group three, also a control group.

The test was conducted three times. Period "-1" was
the control period consisting of the change in volume in
the two week trading period before the lO-K signal from
the corresponding two week trading period of the previous
year. Period "0" covered the change in volume in the two
week period of receipt of the lO-Ks, and period "+1" was

the change in volume in the two week period after the lO-K

receipt period. Test results are shown in Table 5-1.

TABLE 5-1

Kruskal-Wallis Test

 

Period -1 0 +1
T 2.665 7.836 1.467
(not significant (significant (not significant
at a = .25) at g = .025) at g = .25)

 

The table shows a T of 2.665 for control period "-1".
This value is not statistically significant. Accordingly,
the null hypothesis of equal population distribution func-

tions can not be rejected for the first control period.

85

For the test period (period "0") T is 7.836, which is sig-
nificant at an alpha level of .025. Therefore the null is
rejected for the test period in favor of the alternative
hypothesis of unequal p0pulation distribution functions.
For control period two (period "+1") T is 1.467; again not
significant at an alpha level of .25 and the null cannot
be rejected.

The results of the main tests show the population
functions to differ only in the period during which the
environmental statute compliance effect signal was received.
It would be useful to see what caused the rejection of the
null. If the sample ranks for the test period are divided
into sixths, it can be seen that the test group ranks are
more clustered toward the bottom of the ranks (high ranks).

Table 5-2 shows the test period rank clustering.

TABLE 5-2

TEST PERIOD RANK CLUSTERS

 

 

 

Group Ranks
1-23 24-46 47-69 70-92 93-115 116-138
I 12 8 16 ll 9 8
II 2 4 3 4 6 9

III 9 11 4 8 8 6

 

86
The Table shows that two-thirds of the test group
ranks are in the second half of the Table. This fact is
further substantiated by examination of summary statistics

on the test period ranks. (See Table 5-3). The summary

TABLE 5-3

TEST PERIOD RANK SUMMARY STATISTICS

 

 

Group I Group II Group 111
Mean Rank 65.05 88.46 64.13
Standard Deviation 37.02 38.03 41.18

 

statistics show the mean rank of the test group to be

88.46, while the mean ranks of the control groups are almost
identical at around 65. The standard deviations for all
three groups are very close, 37.02 to 41.18. This indi-
cates that no group ranks were polarized. The two Tables
together indicate the significant difference in the test
period was less trading in group two, the firms initiating
the environmental statute effect compliance signal.

Scheffe’ post hoc procedures give a formal basis for that

conclusion which shows up informally in Tables 5-2 and 5-3.

Scheffe’ Post Hoc Results

 

The Scheffe’ post hoc technique allows direct compari-

sons to be made on the three groups. The ideal test result

87
would be for group two to be different from groups one
and three, and for groups one and three to not differ.
This would verify the apparent differences shown in Tables
5-2 and 5-3. Since all three groups are alike in both con-
trol periods, if the only differences in the test period
are between the test group and the control groups, it
would indicate that the initial environmental statute
compliance effect signal caused a volume reaction in the
stock market. To test for this condition, simple contrasts

are constructed for the test period:

(1) W1 =R2 - R1

= 88.46 - 65.05
= 23.41

(2) W2 = R2 - R3

= 88.46 - 64.13
= 24.33

(3)w =fil-ii

3
= 65.05 - 64.13
= 0.92
In each case the null is that the expected contrast

equals zero, and the alternative is a denial of the null:

H ' E(Wi) # O

88
In order to test the null hypotheses, ninety percent
confidence intervals are constructed around the contrasts.
The decision rule is to reject the null if the confidence
interval does not include zero. The intervals are con-

structed as follows:

 

Wi : (x§_1 (l-o) )15 (VAR(Wi) );5
2

_ N(N+1) ak

VAR(Wi) — "I§“' 2k “k

Where "a" is the weight assigned to the
mean rank of group k in the contrast.

For the simple contrasts "a" is equal to one. The

confidence intervals are:

(1) W1 1 (x§_l (1-a) )15 (VAR (W1) )15
= 23.41 i (4.605);5 (32.066)l5
= 23.41 i 19.44

(2) W2 : (x§_l (1-a) )£5 (VAR (W2) )3
= 24.33 : (4.605);5 (91.839)%
= 24.33 i 20.57

(3) W3 : (x:_1 (1-a) )l5 (VAR (W3) )15

4.

= 0.92 _ (4.605)% (59.727)%

The null is rejected for contrasts one and two, but not
for contrast three. Thus the simple comparisons indicate

that the volume change for the test group differs from the

89
volume change for each of the control groups in the test

period. Furthermore, the volume changes for the control

groups do not differ from each other in the test period.1

For further evidence, a complex comparison is constructed
comparing the test group to the two control groups in the

test period:

(4) W =R2-3§(R3+R

4 1)

88.46 - %(64.13) + 65.05

23.87

Again, the null hypothesis is that the expected con-
trast equaled zero; with the alternative hypothesis that

the expected value of the contrast is not zero:

H : E(W4) = 0

0

H1: E(W4) # 0

The decision rule is to reject the null if the confi-
dence interval did not include zero. The confidence interval
is constructed the same way as for the simple contrasts,

except that "a" is equal to k for groups one and three.

 

(4) w4 : (x§_1 (1 -a))15 (VAR(w4))15
= 23.87 i (46.605)15 (72.02)15
= 23.87 1 18.21

1

These results were at an alpha level of .10. Had the
confidence intervals been set up with an alpha level of .05
the decisions would have been identical. 95% confidence

intervals are: (1) 23.41 1 22,17

(2) 24.33 i 23.45
(3) 0.92 i 18.92

90
Since the ninety percent confidence interval does
not contain zero, the null hypothesis is rejected at an

alpha level of .10.2

The Scheffe’ post hoc tests show
that the volume reaction of the test group in the test
period was statistically different from the volume reactions

of the control groups.

Conclusions

 

The purpose of this research was to see if environ-
mental disclosures required by the SEC in financial state-
ments were associated with statistically significant dif-
ferences in trading volume. The basis for the research was
SAR 5386 issued in 1973. SAR 5386 amended SEC reporting
forms to incorporate disclosure of the effects of compliance
with statutory requirements respecting environmental quality
upon the registrant. The largest block of initial disclo-
sures came in 10-Ks for 1973 calendar year firms, and this
was the critical event for the research.

Previous research had shown a volume reaction in the
stock market to earnings announcements. A part of the lO-K
is the income statement, which includes an earnings announce-
ment. Therefore, the test procedure had to allow for a
possible volume reaction for all firms at the time of the

receipt of the lO-K. For that reason, a change statistic

 

2The same decision would have been made at alpha
levels of .05 and .025. Those confidence intervals are:

95% C.I. 23.87 £20.77
97.5% C.I. 23.87 1 23.05

91

was used. Specifically, the percentage change in the daily
percentage of shares traded for corresponding two week
blocks from periods surrounding the receipt of 1972 lO-Ks

to periods surrounding the receipt of 1973 lO-Ks. In this
way, any volume reaction to the earnings announcements would
cancel out.

Three groups were tested. The test group consisted
of firms initiating environmental statute compliance effect
reporting in 1973 lO-Ks. The first control group consisted
of firms which began reporting the effects of compliance
with environmental statutes before 1972 lO-Ks. The second
control group was made up of firms which as of 1973 lO-Ks
made no mention of the effects of compliance with environ-
mental statutes. Firms with sources of known volume re-
action in the periods from which data were gathered were
eliminated, e.g. any firm with a dividend announcement in
the six weeks surrounding the receipt of the 10-K for
either 1972 or 1973 was excluded. Firms which initiated
the environmental disclosure signal in 1972 reports had to
be eliminated. If the market reacted to the signal, it
would have been included in 1972 data for those firms.

There were three periods for test purposes. The two
week period of the receipt of the lO-Ks was the test
period. The two week periods on either side of the test
period served as control periods. Using a Kruskal-Wallis
ranking test, all three groups were tested to see if their

change in volume was the same in each of the periods.

92
Results indicate that the change in volume was not differ-

ent for the three groups in either control period surround-
ing receipt of the lO-K. In the test period, however, the
test group was shown to have a statistically different
percentage change in the daily percentage of shares traded
than did the two control groups. The reactions of the
control groups were still not different from each other.
Based on this evidence, the conclusion is drawn that
there is a statistically significant volume reaction in
the capital market associated with disclosure of the effects
of compliance with environmental statutes on the firm. The
data show that the reaction is less trading for the firms
making the environmental disclosure. This could be because
of a reduction of potential buyers, sellers, or both. The
exact causes of the reduction in trading are not ascertain-
able from the data. Still, of one assumes market efficiency,
the disclosure signal, which was associated with a statis-
tically significant volume reaction, can be said to have

informational content under the EMH.

Limitations & Suggestions for Further Research

 

The fact that the market reacted to a signal does not
mean that the signal is optimal. Less costly means of
disseminating the information may exist. The costs of dis-
closure may be greater than the benefits derived from the
disclosure. This research did not attempt any value judge-
ments on the disclosure. It merely tested for a volume

reaction.

93

External validity is always a consideration for this
type of research. Any time a selection criterion is
applied, strictly speaking, the generalizability of the
results is reduced. The main restrictions imposed on firms
selected for this study were: 1) The initial sample came
from Accountinngrends and Techniques, and was not a random
sample of the population of firms. 2) Non-calendar year
firms were not included. 3) Only firms whose stocks were
traded on the New York Stock Exchange were tested. A
general tradeoff always exists between narrowing the sample
to isolate the item being tested, and broadening the sample
to increase generalizability.

A strict interpretation of the external validity is
not necessary. As long as no reason exists to suspect a
systematic difference in the population being discussed
and the population which was researched, the results of the
research can be generalized with reasonable confidence.

Many possibilities for further research have been
suggested by this study. The study tested for a volume
reaction to the disclosure requirement. Price and risk
reactions are other possibilities, especially in light of
the economic nature of the SEC required environmental dis-
closure. Study of these variables might help in inter-
preting the results of the volume reaction. A price
decrease, for instance, could mean that no one wanted to
buy the stock. As mentioned above, the cost/benefit and

optimality of the disclosure were not part of this research.

94

Research could be undertaken to ascertain the dif-
ferences, if any, between small and large investor reac-
tion to the disclosures. Other social disclosures, whether
economic, environmental, or otherwise, could be tested
for reaction. This type of test design lends itself to
checking for investor reaction to noneconomic signals,
provided such signals can be isolated.

The test was positive, not normative. No priors were
used to predict investor reactions. The results indicated
that the reaction was one of less trading on firms that
made the initial disclosure than on other firms in the
sample. No attempt was made to ascertain the rational
for less trading, although in Chapter one it was mentioned
that some investors indicated that nontrading was one action
they might take based on disclosures. A possibility for
future research would be to seek to discover why this par-
ticular signal resulted in a systematic reduction in
trading. This study provided evidence on the question of
whether or not there was a reaction to the disclosure.

The question of why the reaction was a reduction in trading

volume remains for other research.

APPENDIX I

SAMPLE FIRMS

Group 1
Industry

No. Name Code

AMF, Inc. ........................ ..... ............ 394
Allegheny Ludlum Industries, Inc. ........... ...... 331
Allied Chemical Corp. ............................. 281
Alpha Portland Industries, Inc. ................... 324
Anaconda Co. ...................................... 333
Armco Steel Corp. ......... ...... .................. 331
Bemis Co., Inc. ................................... 264
Borden, Inc. ...................................... 202
Carborundum Co. ................................... 327
10 Cities Service Co. ................................ 291
11 Cleveland-Cliffs Iron Co. ......................... 101
12 Continental Can Co., Inc. .. ....... ................ 341
13 Cyclops Corp. ..................................... 331
14 Diamond International Corp. ....................... 262
15 Diamond Shamrock Corp. ............................ 281
16 Dictaphone Corp. .................................. 357
17 E. I. duPont de Nemours & Co. .............. ....... 281
18 Englehard Minerals & Chemicals Corp. .............. 509
19 Foote Mineral Co. ................................. 333
20 CAP Corp. ......................................... 383
21 General Motors Corp. .............................. 371
22 General Refractories Co. .......................... 325
23 Getty Oil Co. ..................................... 291
24 B. F. Goodrich Co. ................................ 301
25 Goodyear Tire & Rubber Co. ........................ 301
26 Gulf Oil Corp. .................................... 291
27 Inland Steel Co. .................................. 331
28 Interlake, Inc. ................................... 331
29 International Telephone & Telegraph Corp. ......... 366
30 Kaiser Aluminum 8 Chemical Corp. .................. 333
31 Kennecott Copper Corp. ............................ 333
32 Kimberly-Clark Corp. .............................. 262
33 Koppers Co., Inc. ................................. 281
34 L.T.V. Corp. ...................................... 201
35 Lone Star Industries, Inc. ........................ 324
36 Marathon Oil Co. .................................. 291
37 Martin Marietta Corp. ............................. 372
38 Mead Co. .......................................... 262

\OCDNO‘U’I-bUDNH

95

96

Group 1 (con't)
Industry
No. Name . Code

39 Merck & Co., Inc. ........... .. ..... . .............. 283
40 Minnesota Mining & Manufacturing Corp. ............ 383
41 Molybdenum.Corp. of America.... ..... ... ............. 331
42 Mensanto Co. ...................................... 281
43 N. L. Industries, Inc. ............... ...... ....... 285
44 National Distillers and Chemical Corp. ............ 208
45 Occidential Petroleum Corp. ....................... 139
46 PPG Industries, Inc. .............................. 321
47 Pfizer Inc. ....................................... 283
48 Phelps Dodge Corp. ........ .............. ..... ..... 333
49 Polaroid Corp. ..... ...... ...... . ........... . ...... 383
50 Quaker State 011 Refining Corp. ......... .......... 291
51 Republic Steel Corp. .............................. 331
52 Reynolds Metals Co. ....... . ....... . ............... 333
53 Rohm & Haas Co. .. ................................. 281
54 Standard Brands Inc. .................... .......... 203
55 Standard Oil Co. (Indiana) ......................... 291
56 Sun Oil Co. ....................................... 291
57 Texaco, Inc. ...................................... 291
58 Textron, Inc. ..................................... 372
59 Timken Co. ........................................ 356
60 Union Camp Corp. .................................. 264
61 Union Carbide Corp. ............................... 281
62 United States Gypsum Co. .......................... 326
63 United States Steel Corp. ......................... 331
64 Wheeling-Pittsburgh Steel Corp. ....... ............ 331.

Group 2
Industry

No. Name Code

American Standard, Inc. ........................... 343
Armada Corp. ...................................... 208
Bliss & Laughlin Ind., Inc. ....................... 331
Brown & Sharpe Manufacturing Co. .................. 354
Dan River, Inc. ................................... 221
Fansteel Inc. ..................................... 333
General Signal Corp. ................ ..... ......... 366
Grumman Corp. ...... ..... .......................... 372
Harsco Corp. ......... ...... ....................... 331
10 Hoffman Electronics Corp. ......................... 366
ll Houdaille Industries, Inc. .. .......... . ..... ...... 371
12 Libbey-Owens-Ford Co. ............................. 321
13 Lockheed Aircraft Corp. ........................... 372
14 MSL Industries, Inc. .............................. 345
15 National Presto Ind., Inc. ........................ 349
16 Ogden Corp. ....................................... 509
17 Portec, Inc. ...................................... 331

\DQNO‘U'IJ-‘UJNH

97

Group 2 (con't)
Industry
No. Name Code

18 Robertson, H.H. Co. ..... ..... ...... ............... 349
19 Safeway Stores, Inc. .............................. 541
20 Signode Corp. .............................. ..... .. 331
21 Square D Go. ...................................... 361
22 Standard Pressed Steel Co. .................. ..... . 345
23 Sterling Drug, Inc. .... ..... ...................... 283
24 Studebaker-Worthington, Inc. ................. ..... 371
25 Sundstrand Corp. .................................. 354
26 Sybron Corp. ...................................... 384
27 United States Tobacco Co. ......................... 213
28 Vendo Co. ............. ........ ... ...... . .......... 358

Group 3
Industry

No. Name Code

ACF Industries. Inc. .................... .......... 374
American Chain & Cable Co.. Inc. ............. ..... 349
American Hospital Supply Corp. .................... 508
American Seating Co. ....................... ....... 251
Arvin Industries. Inc. ............................ 371
Bates Manufacturing Co., Inc. ..................... 221
Bath Industries, Inc. ............................. 373
Bausch & Lomb, Inc. ............................... 383
Belden Corp. .... ..... ............................. 335
10 Belding Heminway Co., Inc. ........................ 221
11 Bell & Howell Co. ................................. 383
12 Cluett, Peabody & Co., Inc. ....................... 231
13 Coca-Cola Co. ..................................... 209
14 Colonial Stores, Inc. ............................. 541
15 Columbia Broadcasting System, Inc. ................ 483
16 Combustion Engineering, Inc. ...................... 349
17 Control Data Corporation ........................... 357
18 Crown Corp & Seal Co., Inc. .................. ..... 341
19 Emhart Corp. ...................................... 342
20 Fairchild Camera and Instrument Corp. ............. 366
21 General American Transportation Corp. ............. 374
22 General Cigar Co., Inc. ........................... 212
23 General Host Corp. ................................ 201
24 Gillette Co. ...................................... 342
25 Hobart Co. ........................................ 355
26 Interstate Brands Corp. ........................... 205
27 Kraftco Corp. ..................................... 202
28 Magnavoc Co. ...................................... 366
29 Maremont Corp. .................................... 371
30 Maytag Co. ........................................ 363
31 McGraw-Hill, Inc. ................................. 271
32 ‘Midland-Ross Corp. ........................... ..... 355

\DmNO\Ul-I>UDNl-'

98

Group 3 (con't)
Industry
No. Name Code

33 Munsinger, Inc. ..... ..... .... ...... . ...... . ....... 231
34 Nabisco, Inc. ..................................... 205
35 Neptune Meter Co. ................................. 381
36 Northrop Corp. ...... ................ .............. 372
37 Purolator, Inc. ................................... 371
38 RCA Corp. ......................................... 365
39 Reynolds, R. J. Industries, Inc. .................. 211
40 Rucker Co. ........................................ 352
41 Singer Co. ........................................ 363
42 Sprague Electric Co. .............................. 366
43 Triangle Industries, Inc. ......................... 335
44 Twentieth Century-Fox Film Corp. .................. 781
45 U.S. Industries, Inc. ............................. 354
46 Xerox Corp. ....................................... 383

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Act of 1934 Release

of 1933 Release No.
Act of 1934 Release

of 1933 Release No.
Act of 1934 Release

of 1933 Release No.
Act of 1934 Release

of 1933 Release No.
Act of 1934 Release

Exchange Commission

Exchange Commission

5170;
No. 9252.

5235;
No. 9498.

5386;
No. 10116.

5569;
No. 11236.

5577;
No. 11339.

5627;
No. 11733.

5653;
No. 11914.

5704;
No. 12414.

5707;
No. 12454.

5906;
No. 14471.

Annual Reports.

News Digest.

L. Seidler, Social Accounting:

 

Cases (MelvillePublishing

"The War on

Pollution," Business Horizons, August 1971, pp. 19-30.

 

104

Simon, Rita James, "Public Attitudes Toward Population and
Pollution," Public Opinion Quarterly, Spring 1971,
pp. 93-99.

 

Spicer, Barry H., "Investors, Corporate Social Performance
and Information Disclosure: An Empirical Study,"
The Accounting Review, LIII, No. 1 (January 1978),
pp. 94-111.

Stans, Maurice H., "How New Standards of Financial Reporting
Grow From Social Responsibility of Accountants," The
Journal of Accountancy, August 1948, pp. 98-106.

Stephens, J. Kirker, "A Theoretical Note on the Capacity
of the Market System to Abate Pollution: A Reply,"
Land Economics, August 1972, pp. 304-305.

 

Thomas, Arthur L., "Evaluating the Effectiveness of Social
Programs," The Journal of Accountangy, June 1976,
pp. 65-71.

Toan, A. B., Jr., "Progress Report of the Committee on
Social Measurement," The Journal of Accountancy,
July 1973, PP. 78-79.

Ward, Barbara and Rene’Dubos, "The Price of Pollution,"
The Journal of Accountancy, July 1973, pp. 62-68.

Weinrich, John E., "Strategic Cost-benefit Factors in
Environmental Performance," Public Utilities Fort-
nightly, February 1968, pp. 32-38.

Weinrobe, Maurice, "Accounting for Pollution: Pollution
Abatement and the National Product," Land Economics,
May 1973, pp. 115-121.

Wood, Thomas D., "A New Reporting Problem for Auditors -
the Impact of Pollution Control on Financial State-
ments," The Journal of Accountancy, March 1972,
pp. 75-77.

Ying, Charles C., "Stock Market Prices and Volumes of
Sales," Econometrica, 34, No. 3 (July 1966), pp.
676-685.

 

 
 
 
  
 

    

  

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