Accounting Statement Footnotes Contextual Association with Firm Financial Characteristics in the Oil and Gas Industry

Abstract

Information quality of financial accounting statements is an issue for readers’ decision-making. This study investigates the association of the annual report readability with the firm’s weighted average cost of capital (a key ratio used in firm valuations and investments). The study focuses upon the oil and gas industry in order to include an analysis of “successful efforts” versus “full cost” accounting methods. Prior studies find that as the level of useful information increases in the financial statements, the corresponding firm’s information asymmetries decrease, resulting in a company’s lower cost of capital (Francis, J. et al. 2008, and Barth M. et al. 2013). The current study findings indicate that the accounting readability of annual reports does associate with weighted average cost of capital. This study extends readability research into this financial ratio footnote and MD&A area. The study also finds the accounting choice of “successful efforts” versus “full cost” affects readability of annual report information, but no association is apparent of the method with the weighted average cost of capital.