An Examination of the Association Between Accounting and Share Price Data in the Extractive Petroleum Industry: A Comment and Extension.

In the April 1975 issue of "The Accounting Review," an article reported the results of an empirical study in there was an attempt to, assess the relative effect which the successful efforts (SE) vs. full cost (FC) method of accounting for exploration costs has on various accounting variables of firms in the extractive petroleum industry and compare the market response to the different accounting numbers generated under these alternative accounting procedures. The objectives of the present paper are to point out certain conceptual ambiguities and logical inconsistencies in the article's analysis, identify several important factors which the article failed to consider in its research design and demonstrate by way of additional research how these factors may have affected the results. In summary, it is believed that empirical evidence with respect to the price effects of the FC vs. SE choice is extremely important and timely given that both the SEC and the FASB currently are considering the subject of accounting in the extractive industries.