The Effect of Accounting for Oil and Gas Reserves on the Relation between Returns and Earnings

Journal of Accounting and Finance Research, Vol. 4, No. 2, pp. 20-32, 1997

14 Pages Posted: 19 Jun 1995 Last revised: 17 Apr 2015

See all articles by Jonathan E. Duchac

Jonathan E. Duchac

Wake Forest University - Schools of Business

Edward B. Douthett

George Mason University - School of Business

Date Written: September 30, 1997

Abstract

This study examines how the choice between successful efforts and full cost methods of accounting affects the value relevance of earnings for firms in the oil and gas industry. The strength of the relation (R2) between twelve month (annual) security returns and annual earnings levels is compared to assess differences in the value relevance of earnings. Focusing on earnings levels provides insight into how this accounting choice affects the usefulness of the entire set of earnings information rather than focusing solely on the information in unexpected earnings as has been the focus in prior earnings usefulness studies (i.e. earnings response coefficient analysis). The results suggest that the strength of the returns - earnings relation is significantly greater for full cost firms than for successful efforts firms in periods of declining oil prices and reduced exploration activity. This is consistent with the hypothesis that earnings generated by accounting methods that smooth income are more value relevant than earnings generated by other methods that generate more volatile earnings.

JEL Classification: M41

Suggested Citation

Duchac, Jonathan E. and Douthett, Edward B., The Effect of Accounting for Oil and Gas Reserves on the Relation between Returns and Earnings (September 30, 1997). Journal of Accounting and Finance Research, Vol. 4, No. 2, pp. 20-32, 1997. Available at SSRN: https://ssrn.com/abstract=55498

Jonathan E. Duchac (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States
910-759-4458 (Phone)
910-759-6133 (Fax)

Edward B. Douthett

George Mason University - School of Business ( email )

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