OIL AND GAS STOCK PRICES AND RESERVE RECOGNITION ACCOUNTING (RRA)

The purpose of the thesis is to analyze a method of oil and gas accounting known as Reserve Recognition Accounting (RRA). Registrants of the Securities and Exchange Commission that are engaged in oil and gas exploration must present RRA information as a component of their published financial statements. Unlike traditional oil and gas accounting techniques, RRA attempts to place a value directly on oil and gas reserves owned by the firm. Although RRA explicitly focuses on the valuation of oil and gas reserves, prior accounting research has not directly linked RRA to an economic model of oil and gas firm valuation. The thesis makes this linkage, and provides empirical evidence on the characteristics of RRA as a reserve valuation method.;The test results suggest that RRA data do not measure well the values of firms' oil and gas operations. In particular, capital market participants' valuations of oil and gas firms differ substantially from those predicted. Given these results, it is unclear that any consistent link exists between RRA data and the market values of oil and gas firms. If no such link exists, then the data may not be providing the information to investors that was intended.;The thesis begins by constructing a valuation model of an oil and gas producing firm in which firms extract oil and gas at constant unit cost and acquire new reserves through discovery. Tests of specification of the model are operationalized as regressions of the market values of firms' oil and gas operations on the model's predicted values. Market values are inferred from the market values of sample firms, and predicted values are obtained from RRA data. Test results are inconsistent with the joint hypothesis that: (1) the theoretical model is specified correctly; and (2) the RRA data measure correctly the theoretical constructs of the model.