Market-wide Effects of Off-Balance Sheet Disclosures: Evidence from the Oil and Gas Industry

• In Event: Effects of Mandatory Disclosure

Abstract

This paper studies the spillover effects of firms’ off-balance sheet disclosures. We focus our analysis on the mandatory disclosure of oil and gas (O&G) reserves, a setting in which off-balance sheet information is particularly important to understand industry competition. Using a comprehensive sample of Canadian and US O&G producers we document two novel results. First, in contrast to prior research on the informational effect of peers’ earnings announcements, we find strong evidence that firms’ exhibit lower stock returns when their peers announce more positive news about O&G reserves. Second, consistent with peers’ disclosures affecting managerial decision making, we document that larger increases in peer’ reserves are accompanied by an increase in firms’ investment. We corroborate our results by exploiting three sources of institutional variation. First, the North-American pipeline infrastructure constrains the supply of natural gas (and thus competition in this market), but not the supply of oil. Second, the introduction of the fracking technology substantially altered the competition dynamics in the natural gas market. Third, mandatory O&G disclosure rules were modified in Canada and the US in a similar fashion, but at different points in time. Overall, our evidence suggests that off-balance sheet disclosures have substantial market-wide effects in the form of both financial and real externalities.

Authors

• Marc Badia, IESE Business School

• Miguel Duro, IESE Business School

• Bjorn N Jorgensen, london school of economics and political science

• GAIZKA ORMAZABAL, IESE Business School