A Test of the Hotelling Valuation Principle

Abstract

Time-series tests of the Hotelling r-percent rule for natural resource prices have not been strongly supportive, but the tests and the data are subject to serious difficulties. We propose here an alternative testing strategy based on another but less widely known implication of the Hotelling model. We test this implication, which we call the Hotelling Valuation Principle, by regressing the market values of the reserves of a sample of U.S. domestic oiland gas-producing companies on their estimated Hotelling values. We find that the estimated Hotelling values account for a significant portion of the observed variations in market values and that the Hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals.