Financial accounting and reporting by oil and gas producing companies: A study of information effects

This manuscript examines the joint hypotheses of market efficiency and information event content occasioned by the Financial Accounting Standards Board's release of the Exposure Draft entitled ‘Financial Accounting and Reporting by Oil and Gas Producing Companies’. In the Exposure Draft, the Board took the position that all firms would report using the successful-efforts method. Concerns were raised that such a change would have a negative impact on the ability of full-cost firms to raise capital. This impact should be reflected in the movement of security returns. The paper uses two methods to test for a difference in the distribution of security returns between full-cost and successful-efforts firms based on the issuance of the Exposure Draft. The first method examines the returns of unit-beta portfolios. The second approach employs prediction errors based on the market model. Our results are not conclusive. There is evidence from both tests of a relative negative impact on the returns of full-cost securities compared to the returns on successful-efforts securities, particularly around the announcement date. However, the strength of the results, when coupled with methodological issues, mitigate against concluding that the alleged substantial market effects exist.