Oil and gas reserves as real options: a value-relevance study

According to construal level theory perspective, spatially and cognitively being istant from the operations of the companies they invest, investors could rely on high-level construals to assess values. We study the case of extractive activity accounting, for which accounting representation issues has remained a controversy for about five decades. During the same period, the sector adopted real options methodologies to price natural resources. Such methodology advantageously links near and remote information. We test their usefulness as a means to capture people intuition by addressing the following question: Do market participants use real-options-like-reasoning to assess long-term strategic assets? To answer, we study the value relevance of oil reserves optional values over 11 years (1996-2006), before the sector has been disrupted by shale explorations. Our model combines the Ohlson's model with the Black Scholes and the Hotelling hypothesis. Our findings highlight the value relevance of cognitive valuation models blending historical values and prospective risk (dispersion) as captured in a non-deterministic valuation model.