Benefits and Costs of Voluntary Disclosures: Evidence from the O&G Industry

• In Event: Emerging Research Discussion Session I

Abstract

In this paper, we aim to provide empirical evidence with respect to the effects of the voluntary disclosures related to probable reserves by Oil and Gas (O&G) firms in under the SEC rule. Specifically, we assess the costs causing the differentiating reporting behavior among O&G firms. In addition, we evaluate the benefits of voluntary disclosures on the capital markets.
Security regulators such as SEC anticipate that more disclosures would provide a more complete picture of a company’s full portfolio of opportunities. Empirical studies have found that Canadian investors attached a higher market value to proved reserves than to probable reserves. Further the breakdown in reserves is more informative about market values than an aggregate reserve measure (Badia 2007). The results suggest that non-proved reserves such as probable reserves provide incremental information to investors.
However, the O&G firms express legitimate concerns over the disclosure of non-proved reserves. For example, Exxon warned the industry to “be willing to accept a higher risk of additional, unwarranted litigation due to the inherent uncertainty associated with these reserves,” if optional reporting is approved (Exxon 2008). Another common concern is that the additional disclosure may also result in revealing competitive information because it might reveal a company’s business strategy, such as the geographic location and nature of its exploration and discoveries (SEC 2008). Thus the O&G industry is divided in the optional disclosure. It is uncertain how many and what type of O&G firms would actually provide the voluntary disclosure of non-proved reserves.
The study contributes to the existing literature in a number of ways. First, to our knowledge, this is the first study to empirically study the impact of the new SEC rule on O&G reporting. The O&G industry is one of the industries that have been examined in numerous accounting studies thanks to its economic significance and political sensitivity. Previous studies have tested the value relevance of historical accounting in the presence of proved reserves disclosure. The SEC acknowledged the fast development of new technologies and new economy and issued sweeping rules to align O&G reporting with the current state. We are one of the earliest to empirically address the application of SEC rules and the effect of new disclosures on the information environment.
Our paper also adds insights into literature on voluntary disclosure by providing additional evidence regarding the association between firm-specific costs and voluntary disclosure decision.

Authors

• Lin Zheng, Mercer University, Atlanta Campus

• Feng Chen, University of Toronto