Firm Risk and Disclosures about Dispersion of Asset Values: Evidence from Oil and Gas Reserves

Abstract

The question we address is whether mandated disclosure about dispersion of nonfinancial asset values can provide information relevant to assessing firm risk. Using a sample of Canadian oil and gas (O&G) firms between 2004 and 2011, we find that the difference between the disclosed 10th and 50th percentiles from the O&G reserves distribution, which measures dispersion of the distribution, is positively associated with future total and idiosyncratic equity return volatility, systematic risk, and credit risk. We also find that disclosure of increased reserves dispersion is associated with weaker stock price reactions to increases in reserves and with increases in bid-ask spreads, both of which indicate the disclosures convey information about risk associated with reserves. Additional tests reveal little evidence of managerial opportunism in the reserves disclosures. Taken together, our evidence suggests that quantitative disclosures about the dispersion of nonfinancial asset values can provide information relevant to assessing firm risk.

The Future of Financial Reporting: Insights from Research

“…A current working paper finds that required disclosure in Canada about the dispersion of the value of oil and gas reserves can aid investors in predicting risk for these firms, and that investors react less to an increase in reserves when the risk associated with the reserves is higher (Badia et al ., ). These findings suggest that risk information could improve investors’ economic decision‐making.…”

“…This figure is Figure in Badia et al . (). Proved reserves (P10) have a probability of at least 90% of being recovered and proved plus probable reserves (P50) have a probability of at least 50%.…”

“…Extracting Risk Information from Canadian Oil and Gas Firms’ Disclosures of Proved and Proved Plus Probable Reserves Source : Badia et al . (). [Colour figure can be viewed at wileyonlinelibrary.com] …”

The Informational Effects of Tightening Oil and Gas Disclosure Rules

“…We refer to this amount as Reserves_Dispersion . Badia et al () find that Reserves_Dispersion predicts future risk in a sample of Canadian O&G firms for the same period. We include this variable to investigate whether our results are driven by a fundamental shift in firm risk after the new regulation.…”

Too Much of a Good Thing? Risk Disclosure and Corporate Innovation.

“…representative of the firm's actual risk, previous studies suggest that risk disclosures in the 10-K filings are meaningful since they affect information asymmetry, abnormal returns, trading volume, and firm volatility(Campbell et al 2014;Kravet and Muslu 2013;Hope, Hu, & Lu 2016;Badia, Barth, Duro, & Ormazabal 2020).…”