The Effect of Oil and Gas Producers' FRR No. 48 Disclosures on Investors' Risk Assessments

Abstract

We hypothesize that oil and gas producers' sensitivity and value-at-risk (VAR) disclosures, mandated by SEC Financial Reporting Release Number 48 (FRR No. 48), convey useful information to investors about commodity betas (defined as the sensitivity of firms' equity price changes to commodity price changes). Consistent with the hypothesis, we find that first-time sensitivity and VAR disclosers experience greater commodity beta shifts at 10-K filing dates than do nondisclosing firms in a matched control sample. To enhance confidence that the observed shifts are associated with FRR No. 48 disclosures, we repeat the analyses in the year before the release was effective, when firms did not disclose sensitivity or VAR. At the prior year 10-K filing dates, we find that firms in the disclosure sample do not exhibit significant commodity beta shifts. We conclude that the results are consistent with FRR No. 48-mandated sensitivity and VAR disclosures providing useful information to investors.

Get full access to this article

View all access options for this article.

References

Ahmed

Beatty

Bettinghaus

2000. “Evidence on the Efficacy of Interest Rate Risk Disclosures by Commercial Banks.” Working paper, Syracuse University, Syracuse, New York and Pennsylvania State University, University Park.

Atiase

Bamber

Freeman

1988. “Accounting Disclosures Based on Company Size: Regulations and Capital Markets Evidence.” Accounting Horizons (March): 18–27.

Barth

Elliott

Finn

1999. “Market Rewards Associated with Patterns of Increasing Earnings.” Journal of Accounting Research 37 (Autumn): 387–413.

Bartov

Bodnar

1994. “Firm Valuation, Earnings Expectations, and the Exchange-Rate Exposure Effect.” Journal of Finance (December): 1755–1785.

Belsley

Kuh

Welsch

1980. Regression Diagnostics. New York: John Wiley and Sons.

Bodnar

Wong

M. H. F.

, 2000. “Estimating Exchange Rate Exposures: Some ‘Weighty’ Issues.” National Bureau of Economic Research Working Paper 7497.

Collins

D. W.

Simonds

R. R.

, 1979. “SEC Line-of-Business Disclosure and Market Risk Adjustments.” Journal of Accounting Research 17 (Autumn): 352–383.

DeMarzo

P.M.

Duffie

, 1991. “Corporate Financial Hedging with Proprietary Information.” Journal of Economic Theory 53 (April): 261–286.

DeMarzo

P.M.

Duffie

1995. “Corporate Incentives for Hedging and Hedge Accounting.” Review of Financial Studies 8 (Fall): 743–772.

10.

Devarajan

Fisher

1981. “Hotelling's ‘Economics of Exhaustible Resources’: Fifty Years Later.” Journal of Economic Literature 19 (March): 65–73.

11.

Dimson

1979. “Risk Measurement When Shares are Subject to Infrequent Trading.” Journal of Financial Economics (June): 197–226.

12.

Dontoh

Ronen

1993. “Information Content of Accounting Announcements.” The Accounting Review 68 (October): 857–869.

13.

Elmy

LeGuyader

Linsmeier

1998. “A Review of Initial Filings under the SEC's New Market Risk Disclosure Rules.” Journal of Corporate Accounting & Finance 9, no. 4 (Summer): 33–45.

14.

Fama

French

1992. “The Cross-Section of Expected Stock Return.” Journal of Finance 47 (June): 427–465.

15.

Fama

French

1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics (February): 3–56.

16.

Financial Accounting Standards Board (FASB). 1982. Disclosures about Oil and Gas Producing Activities. Statement of Financial Accounting Standards No. 69. Norwalk, Conn.: Financial Accounting Standards Board.

17.

Financial Accounting Standards Board (FASB). 1994. Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments. Statement of Financial Accounting Standards No. 119: Norwalk, Conn.: Financial Accounting Standards Board.

18.

Financial Accounting Standards Board (FASB). 1998. Accounting for Derivative Instruments and Hedging Activities. Statement of Financial Accounting Standards No. 133: Norwalk, Conn.: Financial Accounting Standards Board.

19.

Financial Accounting Standards Board (FASB). 2000. Accounting for Certain Derivative Instruments, and Certain Hedging Activities: An Amendment of SFAS # 133. Statement of Financial Accounting Standards No. 138: Norwalk, Conn.: Financial Accounting Standards Board.

20.

Haushalter

2000. “Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers.” Journal of Finance 55 (February): 107–152.

21.

Hirst

Hopkins

1998. “Comprehensive Income Disclosures and Analysts' Valuation Judgments.” Journal of Accounting Research 36 (Supplement): 47–75.

22.

Hodder

Koonce

McAnally

2001. “SEC Market-Risk Disclosures: Implications for Judgment and Decision Making.” Accounting Horizons 15 (March): 49–70.

23.

Hopkins

Houston

Peters

2000. “Purchase, Pooling, and Equity Analysts' Valuation Judgments.” The Accounting Review (July): 257–281.

24.

Hotelling

1931. “The Economics of Exhaustible Resources.” Journal of Political Economy 39 (April): 137–175.

25.

Jorion

1990. “The Exchange Rate Exposure of US Multinationals.” Journal of Business (July): 331–345.

26.

Jorion

2002. “How Informative are Value-At-Risk Disclosures?” The Accounting Review (October): 911–931.

27.

Kane

E. J.

Unal

1988. “Change in Market Assessments of Deposit-Institution Riskiness.” Journal of Financial Services Research 1:207–229.

28.

Kim

Verrecchia

1991a. “Trading Volume and Price Reactions to Public Announcements.” Journal of Accounting Research 29 (Autumn): 302–321.

29.

Kim

Verrecchia

1991b. “Market Reaction to Anticipated Announcements.” Journal of Financial Economics 30 (December): 273–309.

30.

Linsmeier

Thornton

Venkatachalam

Welker

2002. “The Effect of Mandated Market Risk Disclosures on Trading Volume Sensitivity to Interest Rate, Exchange Rate, and Commodity Price Movements.” The Accounting Review (April): 343–377.

31.

Mian

S. L.

1996. “Evidence on Corporate Hedging Policy.” Journal of Financial and Quantitative Analysis 31 (September): 419–439.

32.

Miller

M. H.

Upton

C. W.

1985. “A Test of the Hotelling Valuation Principle.” Journal of Political Economy 93 (January): 1–25.

33.

Nance

D. R.

Smith

C. W.

Smithson

C. W.

1993. “On the Determinants of Corporate Hedging.” Journal of Finance 48 (March): 267–284.

34.

Pincus

Rajgopal

2002. “The Interaction between Accrual Management and Hedging: Evidence from Oil and Gas Firms.” The Accounting Review (January): 127–160.

35.

Rajgopal

1999. “Early Evidence on the Informativeness of the SEC's Market Risk Disclosures: The Case of Commodity Price Risk Exposure of Oil and Gas Producers.” The Accounting Review 74 (July): 251–280.

36.

Rajgopal

Venkatachalam

2000. “Are Earnings Sensitivity Measure Risk-Relevant?: The Case of Oil Price Risk For the Petroleum Refining Industry.” Working paper, Stanford University, Stanford, California.

37.

Roulstone

1999. “Effect of SEC Financial Reporting Release No. 48 On Derivative and Market Risk Disclosures.” Accounting Horizons 13 (December): 343–363.

38.

Schrand

1997. “The Association between Stock-Price Interest Rate Sensitivity and Disclosures about Derivative Instruments.” The Accounting Review 72 (January): 87–110.

39.

Securities and Exchange Commission (SEC). 1995. Proposed Amendments to Require Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Qualitative and Quantitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. Release No. 7250, December 28, 1995 Washington D.C.: SEC. 61 FR No. 5, January 8, 1996.

40.

Securities and Exchange Commission (SEC). 1997. Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments; final Rule (Amendment to Section 210.4-08(n) of Regulation S-X, and to Item 310 of Regulation S-B). Release Nos. 33-7386; 34-38223; IC-22487; FR-48; International Series No. 1047; File No. S7-35-95 (January 31, 1997). Washington D.C.: SEC. 62 FR No. 27, February 10, 1997.

41.

Smith

C. W.

Stulz

R. M.

1985. “The Determinants of Firms' Hedging Policies.” Journal of Financial and Quantitative Analysis 20 (December): 391–405.

42.

Thurby

J. G.

1992. “A Comparison of Several Exact and Approximate Tests for Structural Shift under Heteroscedasticity.” Journal of Econometrics 53 (June): 363–386.

43.

Toyoda

1974. “Use of the Chow Test Under Heteroskedasticity.” Econometrica 42 (May): 601–608.

44.

Tufano

1996. “Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Industry.” Journal of Finance 51 (September): 1097–1138.

45.

Tufano

1998. “The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry.” Journal of Finance (June): 1015–1052.

46.

Verrecchia

2001. “Essays on Disclosure.” Journal of Accounting and Economics 32 (December): 97–180.

47.

Wong

2000. “The Association between SFAS 119 Derivatives Disclosures, and the Foreign Exchange Risk Exposure of Manufacturing Firms.” Journal of Accounting Research 38 (Autumn): 387–418.