The Impact of Accounting Regulation on the Stock Market: The Case of Oil and Gas Companies.

Abstract Few, if any, proposals for a change in an accounting method have triggered such a strong and widespread reaction as did the FASB's oil and gas July, 1977, exposure draft, which proposed to put an end to the "full cost" method. Many of the arguments raised in this controversy touched on the impact of the proposed accounting change on capital markets. To provide evidence on the market impact, the behavior of stock prices of oil and gas companies was analyzed in this study. Results indicate that the release of the exposure draft was associated with a decline of about 4.5 percent, on average, in the stock prices of "full cost" companies during a period of three days succeeding the release of the exposure draft. This market reaction appears to be relevant to accounting policy makers.