UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: This paper studies financial statement information from the largest oil and gas companies and evaluates their relation to firm market value. The accounting literature states that an important feature of financial statements and, in particular net income, is the usefulness for predicting future cash flows. However, financial analysts covering this sector prefer a number of alternative non-GAAP income measures to disclosed net income. Using a dataset of 72 largest integrated and exploration and production companies (E&Ps) during 1993-2013, we examine the relative value-relevance of net income versus eight alternative profitability measures. Despite the analyst preference for non-GAAP measures, our results suggest that net income is the most value relevant earnings measure for integrated oil & gas companies. By contrast, cash flow measures dominate for exploration and production companies. However, we find that free cash flow, which many oil company analysts refer to these days, has low value relevance.

Keywords: Company Valuation; Value-relevance; Financial Analysts; Oil & Gas Industry

JEL-codes: G12; M21; M40; Q49

34 pages, December 18, 2015

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