| The purpose of this study is to examine the value-relevance of earnings and book value under three alternative accounting methods—full expense (FE), full cost (FC), and successful efforts (SE). This study uses exploration and development (E&D) expenditures for oil and gas firms to examine the value-relevance of the alternative accounting methods. The results from a sample of 113 firms are mixed. The results suggest there is no difference in the value-relevance of FE, FC, and SE earnings, but there is a difference in the value-relevance of book values. Specifically, the results indicate that FC book value has greater explanatory power than SE book value, which has greater explanatory power than FE book value. Additionally, an analysis of the components of earnings suggests that the cash outlay for E&D is valued as an investment, rather than a current period expense. An analysis of the components of book value provides some support for the value-relevance of the FC E&D asset.; An interesting finding of this study is the importance of the research design used. Prior researchers use cross-firm designs when examining the SE and FC accounting methods, whereas this study uses a within-firm design. The results from this study indicate that the cross-firm design results in incorrect inferences regarding the value-relevance of the alternative methods.; While this study uses E&D expenditures to examine the alternative accounting methods, I believe that the results also have implications for R&D accounting. I argue that E&D and R&D are economically similar and therefore, the results of this study can be extended to R&D accounting. This suggests that the current method of accounting for R&D expenditures, the FE method, omits relevant information about a firm's book value. |
