DP12144 Firm Risk and Disclosures about Dispersion in Asset Values:

Author(s): Marc Badia, Mary E. Barth, Miguel Duro, Gaizka Ormazabal
Publication Date: July 2017
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12144

This study examines whether mandated disclosure about the dispersion of the value of oil and gas (O&G) reserves provides information about firm risk. Based on a sample of Canadian O&G firms between 2004 and 2011, we find that the difference between the 10th and 50th percentiles of O&G reserves, which is a measure of dispersion of the reserves distribution, is positively associated with future total and idiosyncratic equity return volatility, systematic risk, and credit risk. We also find that disclosure of increases in reserves dispersion is associated with weaker stock price reactions to increases in reserve levels and with increases in bid-ask spreads, both of which indicate the disclosures convey information about risk associated with the reserves. Additional tests reveal it is unlikely that our findings are attributable to managerial opportunism in estimating reserves. Taken together, our study provides evidence that disclosures relating to the dispersion of non-financial asset values can provide information relevant to assessing firm risk.