AN EMPIRICAL INVESTIGATION INTO THE INFORMATION CONTENT OF THE REQUIRED DISCLOSURE OF OIL AND GAS RESERVE VALUES

This empirical study is concerned with whether the oil and gas reserve value data reported by petroleum producers have been utilized by investors. Reporting reserve value data based on a present value approach is the initial step toward the development of the Securities and Exchange Commission's new accounting method called "Reserve Recognition Accounting" (RRA) for oil and gas producers. Experimentation with this new accounting concept in the oil and gas industry has been adopted as a tentative resolution of the long-standing controversy over valuation of oil and gas reserves and the measure of income from oil and gas exploration. Evidence gathered in this research will be valuable to the SEC in its efforts to assess the usefulness of RRA.;In the first design, the information of interest is the scaled (by market price of common shares) end-of-year present value per share of companies analyzed. The basic procedure involves forming equal risk portfolios from sample firms and from randomly selected control firms that differ only with regard to this attribute of "information." If this disclosure of reserve value data contained no information pertinent to the pricing of oil and gas producers' securities, one would expect the stock returns realized by the portfolios to be equal during a period of twenty trading days surrounding the disclosure date. The Hotelling's T('2) statistic is used to determine if a significant return difference exists between the returns of the matched portfolios.;In the second design, the information of interest includes the end-of-year reserve value, the end-of-year adjusted reserve value (reserve value adjusted for net working capital, long-term liabilities, and preferred stock), and the present value of additions to reserves during the current year. Each of these measures was scaled, either by the market price of common shares or by the total revenue, to abstract for the size effect. Five information variables were specified, and they were associated with a set of eight market-based variables represented by systematic returns and residual returns from four thirteen-week periods, each covering a critical event related to the SEC's decision to require reserve value disclosure. The association test was analyzed by the multivariate technique of canonical correlation.;This report concludes that (1) The reserve value disclosure under the SEC-prescribed rules did not have a measurable impact on the stock prices of oil and gas producers at the time the data were actually disclosed. It appears that the information has already been impounded in security prices prior to the actual disclosure, possibly around the time the SEC announced its initial proposal and the time it issued the final rules; (2) Investors did not behave as if the static measures of unadjusted values of proved reserves are effective signals in pricing securities. The effective signals are represented by the present value of additions of reserves during the current year. However, the adjusted reserve value appears to contain more information than does the static measure of unadjusted reserve value.;This dissertation assumes capital market efficiency and addresses two specific questions. First, do investors behave as if the reported end-of-year reserve value data are effective signals for pricing securities of oil and gas producers? Second, has the SEC-mandated reserve value disclosure induced any response in the capital market? Two research designs were employed to permit extensive investigation of these two questions.