The Effect of Oil and Gas Producers' Frr No. 48 Disclosures on Investors' Risk Assessments

Abstract

We hypothesize that oil and gas producers' 10-K market risk disclosures, recently mandated by SEC Financial Reporting Release Number 48 (FRR No. 48), convey useful information to investors about commodity betas (defined as the sensitivity of firms' equity price changes to commodity price changes). Consistent with the hypothesis, we find that a sample of firms disclosing sensitivity or value-at-risk (VAR), as mandated by FRR No. 48, tend to experience greater commodity beta shifts at 10-K filing dates than do non-disclosers in a matched control sample. To enhance confidence that the observed shifts are associated with FRR No. 48 disclosures, we repeat the analyses in the year before the release was effective, when firms did not disclose sensitivity or VAR. At the prior year 10-K filing dates, we find that neither the disclosure nor the control sample experienced significant commodity beta shifts. We conclude that the results are consistent with FRR No. 48-mandated sensitivity and VAR disclosures providing useful information to investors.

Keywords: disclosure regulation, market risk disclosures, derivatives, oil and gas industry, commodity beta

JEL Classification: M41, M45, G12, G13, L71