The Effect of Supplemental Reserve-Based Accounting Data on the Market Microstructure

At the present time, considerable attention is being devoted to the merits of accounting information obtained from valuation bases other than historical cost. Alternative valuation bases could provide relevant information in the context of firms with impaired or appreciated assets. In this article, we focus on the extractive petroleum industry where serious reservations about the usefulness of historical cost information and the need for supplemental reserve-based present value data were expressed by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) as far back as the 1970s (FASB 1976; SEC 1978). From a societal perspective, usefulness is a necessary but not a sufficient condition for regulation (Lev 1988, p. 2); rather, financial disclosure regulation is motivated primarily by the need to reduce information asymmetry or inequity in the capital markets. In this paper, we evaluate the reserve-based resent value disclosures for a sample of oil- and gas-producing firms by investigat­ing the effects of disclosure on the informed trading component of bid/ask spreads