The relationship of environmental issues to accounting is that the environmental activities of a company may result in payments for investigations, remediation, maintenance, monitoring, management, and legal costs related to hazardous waste sites. Material prospective payments lead to a liability which should be reported on the financial statements. This study examines the environmental activities and financial characteristics of agribusiness firms that lead a lender to assess a material environmental liability status for the agribusiness firm.; The investigation included: (1) predicting sources of potential environmental liability based upon the specific environmental activities of the firm; (2) predicting the environmental liability status that a lender will determine based upon the firm's potential environmental liability, legal liability for current hazardous waste sites, and firm size; and (3) determining the price effect of a material environmental liability status through an increase in interest rate charged to the agribusiness borrower. Ordinary least squares regression was used to predict the sources of potential environmental liability and environmental liability status, and to estimate the price effect of a material environmental liability status. Logistic analysis was used to estimate the probability that a lender would assess a firm with a material environmental liability status.; Results indicate that the sources of potential material environmental liability are an increasing function of the number of underground storage tanks owned by the company, and the number of recent pesticide violations of the company. Affiliation with specific industries also affects the sources of potential material environmental liability. The environmental liability status of a firm is an increasing function of the sources of potential material environmental liability and a decreasing function of the size of the company. A company affiliated with specific SIC codes and named as a Potentially Responsible Party has a reduced probability of being assessed with a material environmental liability status. Evaluation of the interest rate charged on each loan indicates that a predicted material environmental liability status and a predicted probability of a material environmental liability status have a positive effect on the interest rate charged on loans to agribusiness borrowers.
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