Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/194738 
Authors: 
Year of Publication: 
2017
Citation: 
[Journal:] Cogent Economics & Finance [ISSN:] 2332-2039 [Volume:] 5 [Issue:] 1 [Publisher:] Taylor & Francis [Place:] Abingdon [Year:] 2017 [Pages:] 1-14
Publisher: 
Taylor & Francis, Abingdon
Abstract: 
For more than 40 years, oil and gas companies have been able to choose between two competing methods for accounting for exploration activities. The implication is that two otherwise identical companies can report substantially different earnings depending on chosen method. This situation, where oil and gas company managers have discretion to choose between different accounting methods, has transpired because of intense lobbyism towards accounting standard setters by oil and gas companies in favour of one of the methods. The existence of two accounting methods is concerning since investors will struggle to uncover the true underlying performance of oil and gas companies. We conjecture that investors will resort to operating cash flows to evaluate oil company financial performance since cash flows are less affected by managers' discretion than earnings are. In this study, we investigate the relevance to investors of earnings versus cash flow for oil and gas companies. Our results show that cash flow measures, but not earnings, are significantly associated with oil company returns. These findings suggest that the financial markets lack confidence in oil company earnings, irrespective of accounting method used, and investors therefore prefer cash flows as measures of underlying financial performance.
Subjects: 
full cost vs. successful efforts
oil company valuation
oil and gas exploration
cash flows
earnings
profitability
shareholder returns
oil pricegas prices
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.