Evaluating environmental liability through risk premiums charged on loans to agribusiness borrowers

Environmental activities of a company may result in payments for hazardous waste site costs. Based upon current financial accounting standards, prospective payments for these costs are not always reported as liabilities on financial statements. Agribusiness lenders require complete information on the environmental status of agribusiness borrowers in order to assess the potential effects of environmental liability. In addition, agribusiness lenders have been held responsible by the judicial system for the environmental problems of their borrowers. Publicly available, financial and environmental data was used to develop models to quantify the effects of environmental status regardless of whether environmental liabilities are included in the financial statements. The results indicate that environmental status is dependent upon source of environmental hazard and company size, adjusted for industry affiliation. Affiliation with particular 4‐digit SIC codes reduces the probability of the borrower being considered a significant environmental liability risk. [EconLit Citations: Q13, K32, G20].