Risk Premiums for Environmental Liability: Does Superfund Increase the Cost of Capital?

Superfund liability may impose financial risk on investors and thereby increase firmsʹ costs of capital. We analyze monthly stock returns for 73 chemical companies using several measures of Superfund exposure. Additional exposure appears to increase costs of capital for larger firms, but perhaps not for smaller firms. From 1988 to 1992, we estimate an average increase in cost of capital for 23 larger firms of between 0.25 to 0.40 percentage points per year. The social cost of Superfund-related financial risk in the chemical industry may be as high as $800 million annually or enough to clean up about 20 sites.