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Industry upheaval and valuation: Empirical evidence from the international oil and gas industry

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  • Misund, Bård
  • Asche, Frank
  • Osmundsen, Petter

Abstract

Accounting literature suggests that contemporaneous earnings are more useful than current operating cash flow in predicting future cash flows and, therefore, also more relevant for company valuation. However, recent research indicates that elevated levels of merger and acquisition activity or a changing economic environment may reduce the value relevance of earnings. Using the oil and gas industry as a case, this paper examines how the oil industry upheaval in the late 1990s influenced the value relevance of financial statement information. We extend the literature by testing for a structural shift in the equity market valuation process. Our results provide evidence of a structural break in the value relevance of accounting information. In contrast to prior research, we find that the value relevance of cash flows actually decreased in the recent oil industry upheaval. On the other hand, the value relevance of book equity increased. Furthermore, we find that accounting-method choice (full cost versus successful efforts) affects the value relevance of accounting information.

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Bibliographic Info

Article provided by Elsevier in its journal The International Journal of Accounting.

Volume (Year): 43 (2008)
Issue (Month): 4 (December)
Pages: 398-424

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Handle: RePEc:eee:accoun:v:43:y:2008:i:4:p:398-424

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Web page: http://www.elsevier.com/locate/inca/620179

Related research

Keywords: Company valuation Value relevance Earnings quality Oil and gas industry;

References

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  1. Osmundsen, Petter & Mohn, Klaus & Misund, Bard & Asche, Frank, 2007. "Is oil supply choked by financial market pressures?," Energy Policy, Elsevier, vol. 35(1), pages 467-474, January.
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Cited by:
  1. Osmundsen, Petter, 2009. "Chasing reserves - Incentives and ownership," UiS Working Papers in Economics and Finance 2009/6, University of Stavanger.

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