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

Abstract In the extractive petroleum industry two basic methods of accounting for exploration expenditures have evolved namely, field or successful efforts costing and full costing. The two methods differ in two important ways. First, the geographical size of the cost center within which exploration costs are collected and, second, in the treatment of unproductive exploration expenditures. Under field costing, a cost center consists of a single lease or producing field and under full costing a cost center is often as large as an entire country or continent. Considerable controversy has arisen within the extractive petroleum industry and the accounting profession over the effect that the adoption of one or the other of these methods could have on the economic circumstances of the adopting firm, as of April 1975. The first part of this article utilizes two groups of comparable extractive petroleum firms to examine the relative effect of the two methods on the expense and profit streams. The results of the intergroup comparisons suggest the formulation of a hypothesis regarding the market response to the accounting earnings streams. Second, the hypothesis is tested once by using the sample means and a second time using estimates of the association between accounting data and share price data.