Oil and gas reserve value disclosures and bid-ask spreads

Abstract

My paper presents empirical evidence to suggest that the initial disclosure of the discounted present value of oil and gas reserves, mandated by the United States Securities and Exchange Commission (SEC) in Accounting Series Release No. 253 (ASR 253) (SEC, 1978) was associated with a decline in the bid-ask spread of disclosing firms' common stock that appears to have persisted for the twelve month period following the initial reserve disclosures. This finding is important because it implies that ASR 253 equalized access to information across classes of investors, thereby enhancing the equality of opportunity in financial markets. The objective of decreasing information asymmetry and increasing equality of opportunity in financial markets is an operational criterion for disclosure regulation which also provides accounting researchers with a means to study the effectiveness of accounting policy. The results of this study suggest that ASR 253 (SEC, 1978) constituted effective public policy because it helped mitigate information asymmetry. The question of whether or not firms should be required to disclose value-based measures of assets and liabilities is important and timely because regulators appear to be moving toward a policy of expanding fair value disclosures.