Revisiting the Reportedly Weak Value Relevance of Oil and Gas Asset Present Values: The Roles of Measurement Error, Model Misspecification, and Time Period Idiosyncrasy

Abstract

This paper investigates three potential explanations for the puzzlingly weak value relevance of oil and gas asset present values documented in prior research: measurement error, model misspecification, and time-period idiosyncrasy. I operationally define the magnitude of measurement error as the measurement error variance, estimated using an errors-in-variables two-stage regression model similar to that used by Barth (1991) and Choi et al. (1997). I find that (1) measurement error in the present value measure of oil and gas assets is on average less than the measurement error in the historical cost asset measure; (2) oil and gas assets measured at present value explain significantly more across-firm and across-time variation in stock prices than oil and gas assets measured at historical cost; and (3) model misspecification partially accounts for the puzzlingly weak reported value relevance of the present value measure in prior research.