Measurement of corporate environmental performance: The role of regulatory enforcement policies in the oil and gas industry

Measures of corporate environmental performance need to be objective, accurate, and reliable in order to meet the objectives of the stakeholders interested in this information. This study examines one widely used measure of corporate environmental performance: the citations issued by the Environmental Protection Agency (EPA) against firms for non-compliance with environmental regulations. This measure is examined in the context of the oil and gas industry, which is considered one of the more polluting industries. The results from this study show that larger firms are more likely to be cited for an EPA violation. In addition the study provides weak support that financially healthier firms are cited more often. Together these results seem to indicate that the EPA's enforcement policies target firms that are politically more visible and perhaps financially more solvent. Based on these results we argue that the number of EPA citations as a measure of environmental performance is biased because it does not accurately or reliably capture the extent of a firm's environmental concerns and potential exposure. Currently emerging SEC policies, and to some extent FASB policies, dealing with mandated environmental disclosures rely heavily on EPA compliance data. The results from this study suggest that drawing inferences from this information without taking into account the embedded EPA biases may lead to erroneous conclusions, and therefore to defective disclosure and management policies.