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On the Pricing of Mandatory DCF Disclosures: Evidence from Oil and Gas Royalty Trusts

59 Pages Posted: 7 Jan 2014 Last revised: 28 Nov 2015

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Richard G. Sloan

University of California, Berkeley - Accounting Group; University of Southern California - Leventhal School of Accounting

Jenny Zha Giedt

George Washington University - School of Business

Date Written: February 25, 2015

Abstract

We identify a setting in which firms are required to disclose discounted cash flow (DCF) estimates relating to the value of their primary assets. ASC 932 (formerly SFAS No. 69) has mandated DCF disclosures for proved oil and gas reserves since 1982, and these reserves constitute the primary assets of oil and gas royalty trusts. For a hand-collected sample of oil and gas royalty trusts, we find that (i) the mandatory DCF disclosures are incrementally value relevant over historical cost accounting variables; (ii) investors misprice royalty trust units because they underweight the disclosed DCF estimates when forecasting future distributions; and (iii) media articles bringing attention to discrepancies between price and the disclosed DCF estimates are significant stock price catalysts. While our evidence indicates that mandatory DCF disclosures can be incrementally useful for security valuation, it also indicates that investors may overlook such information, potentially due to lack of attention and accounting expertise.

Keywords: Royalty Trusts; ASC 932; Cash Flow Forecasts; DCF Valuation; Media Coverage; Information Dissemination

JEL Classification: M41; G00

Suggested Citation

Patatoukas, Panos N. and Sloan, Richard G. and Zha Giedt, Jenny, On the Pricing of Mandatory DCF Disclosures: Evidence from Oil and Gas Royalty Trusts (February 25, 2015). The Accounting Review, November 2016. Available at SSRN: https://ssrn.com/abstract=2375552 or http://dx.doi.org/10.2139/ssrn.2375552

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/site/panossom/

Richard G. Sloan

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Jenny Zha Giedt

George Washington University - School of Business ( email )

Washington, DC 20052
United States

HOME PAGE: http://www.jennyzha.com

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