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The Value Relevance of Accounting Figures in the Oil & Gas Industry: Cash Flow or Accruals?

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  • Misund, Bård

    (UiS)

  • Osmundsen, Petter

    (UiS)

Abstract

This paper studies financial statement information from the largest oil and gas companies and evaluates their relation to firm market value. The accounting literature states that an important feature of financial statements and, in particular net income, is the usefulness for predicting future cash flows. However, financial analysts covering this sector prefer a number of alternative non-GAAP income measures to disclosed net income. Using a dataset of 72 largest integrated and exploration and production companies (E&Ps) during 1993-2013, we examine the relative value-relevance of net income versus eight alternative profitability measures. Despite the analyst preference for non-GAAP measures, our results suggest that net income is the most value relevant earnings measure for integrated oil & gas companies. By contrast, cash flow measures dominate for exploration and production companies. However, we find that free cash flow, which many oil company analysts refer to these days, has low value relevance.

Suggested Citation

  • Misund, Bård & Osmundsen, Petter, 2015. "The Value Relevance of Accounting Figures in the Oil & Gas Industry: Cash Flow or Accruals?," UiS Working Papers in Economics and Finance 2015/19, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2015_019
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    References listed on IDEAS

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    Cited by:

    1. Tega Anighoro, 2020. "Value relevance of the components of oil and gas reserve quantity change disclosures of upstream oil and gas companies in the london stock exchange," Papers 2005.14659, arXiv.org.
    2. Bård Misund, 2016. "Vertical integration and value-relevance: Empirical evidence from oil and gas producers," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1264107-126, December.
    3. Yeny Esperanza Rodríguez Ramos & John William Rosso Murillo, 2021. "The Profitability of Electricity, Oil, and Gas Utilities in America: An Analysis Focused on Colombia," Revista Facultad de Ciencias Económicas, Universidad Militar Nueva Granada, vol. 29(1), pages 27-48, March.
    4. Bård Misund, 2017. "Accounting method choice and market valuation in the extractive industries," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1408944-140, January.

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    More about this item

    Keywords

    Company Valuation; Value-relevance; Financial Analysts; Oil & Gas Industry;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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