Environmental Liability Estimates and Equity Value of Oil Firms in Nigeria

Abstract

The purpose of this study is to examine whether decommissioning and environmental restoration estimates affect equity valuation of oil firms in Nigeria. The study also examined whether changes in these environmental liability estimates are value relevant in Nigeria. The study analysed data from four listed oil firms that estimated and reported decommissioning liabilities in their annual reports from 2012 to 2018, using regression analysis technique. Findings indicate that investors in Nigeria’s oil and gas firms negatively value environmental liability estimates. This finding is possibly because Nigerian investors view these estimates as representing the extent to which the firm will damage the environment. Given the adverse effect of environmental degradation in Nigeria, investors are wary of any indication of environmental violation. However, changes in decommissioning and restoration estimates are not associated with variations in the market value of oil firms in Nigeria, probably due to lack of investors’ sophistication in appreciating the basis for these changes. Further, some listed oil firms did not provide for environmental liability in their annual reports for the seven years examined, possibly because there is no legal obligation to restore the environment. These findings should motivate environmental regulators in Nigeria to consider laws that will expressly mandate environmental restoration for polluting firms in the country. With such legal requirement, accounting regulators could ensure that oil firms (with facilities that affect the environment) recognise provision for environmental liabilities in their financial statements.