Market Microstructure Effects of U.S.-Canada Differences Relating to Reserve-Based Accounting Disclosures

High disclosure standards are perceived to be the cornerstone of the U.S. securities markets. However. the Securities and Exchange Commission (SEC) prohibits the quantification of unproved reserves by U.S. oil and gas firms (based on the argument that it would mislead unsophisticated individual investors) although such disclosure is permitted abroad. More­ over, the SEC does permit Canadian firms listed on U.S. exchanges to disclose unproved reserves information since the disclosure is permitted by Canadian regulations. In this paper, the relevance of unproved reserves information is investigated in an international context using a market microstructure methodology based on theoretical models which indicate that the response of the midpoint of the bid-ask spread to unexpected trading activity is a conse­quence of asymmetric information. The results suggest that for U.S. firms disclosure of the magnitude of unproved reserves could potentially improve market quality and favorably impact the market microstructure