The Value Relevance and Timeliness of Write Downs reported by U.S. and European Firms in the Oil and Gas Industry

Johanna Margareta Forsberg & Sigrid Viken Hemstad

Student thesis: Master thesis


In this thesis we study the value relevance and timeliness of quarterly-write-downs reported by U.S. and European firms in the oil and gas industry during Q1 2012 to Q4 2015. The chosen period reflects both a period before and after the initial oil price drop inmid-2014. The period after the initial drop has had major impact on company finances, as the oil price as the oil price has not yet recovered to normal levels. The period with low oil price provides a feasible setting in which to study value relevance of write-downs as the lower price leads to lower estimated future cash flows, which in turn increases the risk of write-downs. Further, by including the period before the oil price decline we are enabled to study changes of value relevance of accounting information when the economic environment changes. We investigate the value relevance of write downs by performing two tests; an incremental association test measuring the association between write-downs and contemporaneous share price and share returns; and a relative association test investigating whether net including write-downs explain more of the variation in share price and share return than net income excluding write-downs. Lastly, we test whether write-downs are timely reported by examining the association between writedowns and lead and lagged returns. Our study of value relevance is a way to operationalise the characteristics of relevance and reliability as defined by FASB and IASB in their joint Conceptual Framework. In the incremental association test show a significantly negative association between write-downs and both share price and share return. Based on these results we find the write-downs undertaken by firms in the oil and gas industry in the period under study to be value relevant for investors. The results of the relative association test show that value relevance of accounting information decrease in the periods after the oil price drop in mid-2014, a period where the oil price is at its lowest levels. However, we believe that the observed increased frequency and total dollar amount of reported losses is the reason for the observed lower value relevance of accounting information in this period. Lastly, we find write-downs to be associated with both contemporaneous and lead return, indicating writedowns to be partly anticipated and partly unanticipated. The association with contemporaneous return is evidence that write-downs are reported in a timely manner. We find write-downs to be of confirmatory value to investors as the reported write-downs partly confirm what have already been anticipated by the market. The association with lead return suggest that write-downs also are of predictive value for investors, as write-downs can be perceived as new information to the market. We believe the findings of write-downs being of confirmatory and predictive value for investors confirms the relevance of the reporting write-downs. The finding of the reported write-downs to be both value relevant and timely also confirms that the write-downs are free from measurement error, and thus reliably recognised.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2016
Number of pages129
SupervisorsKim Pettersson