Do RRA Earnings Improve the Usefulness of Reported Earnings in Reflecting the Performance of Oil and Gas Producing Firms?

Abstract

This study employs a regression model and an inside-trading model to evaluate whether three component values of the Reserve Recognition Accounting (RRA) Supplemental Earnings Summary improve the extent to which reported earnings reflect factors affecting stock prices. The analysis is conducted for the 1979-1980 period of volatile oil prices, when the events that the RRA Earnings Summary was designed to reflect (exploration and discovery) were more likely to be significant.

Results from the regression analysis indicate that RRA earnings variables make a significant incremental contribution to explaining the variance in abnormal returns accumulated over the fiscal years described by the annual earnings values. Results from an inside-trading model indicate that advance knowledge of RRA earnings would be more useful to an investor than advance knowledge of the traditional historical cost earnings. The implication of these results is that data from the RRA Supplemental Earnings Summary improve the usefulness of reported earnings in reflecting the performance of oil and gas producing firms.

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