Stock Returns and Oil and Gas Pronouncements: Replication and Extension

Abstract

On October 22, 1971, the Accounting Principles Board (APB) tentatively endorsed the successful efforts (SE) method over the full cost (FC) method of accounting for extractive industries. Because of the negative reaction to this memorandum no formal opinion was released regarding this issue. On July 15, 1977, the Financial Accounting Standards Board (FASB) issued an exposure draft which also favored the SE technique as the appropriate method. This proposal was affirmed on December 5, 1977, by the release of FASB Statement No. 19. The unfavorable reaction to FASB Statement No. 19 led to the release of Accounting Series Release (ASR) No. 253 by the SEC (reported 8/30/78) which overruled the FASB and indicated the SEC's intention to develop a form of the FC method that would be acceptable for SEC reporting purposes. The FASB subsequently suspended the portion of Statement No. 19 that required the SE method. These events were subjected to the typical event-type studies in accounting. With respect to the 1971 APB memorandum Patz and Boatsman [1972] found no significant decline in the stock prices of FC firms relative to SE firms in the six weeks surrounding the APB announcement. In contrast, both Collins and Dent [1979] and Lev [1979] concluded that FC stock prices responded negatively to FASB Statement No. 19. However, Dyckman and Smith [1979] and Haworth, Matthews, and Tuck [1978] did not feel their evidence was strong enough to warrant such a conclusion for 19. Collins, Rozeff, and Dhaliwal [1981] also found that firms whose financial statements were deemed materially affected by the