These disadvantages are supported by a study of 36 FC firms conducted by Touche Ross & Co. (1977) who found that a switch to SE would mean a reduction of reported earnings by average 20%, reducing carrying values of oil and gas properties by average 30% and reduce shareholders’ equity by 16%. (Collins and Dent, P.6 or actual article) These results suggest that earnings announcements of these companies will have an adverse affect on their share price because investors will react by selling shares due to the detrimental affect of switching to SE accounting method. Capital market research believes that the relationship between earnings announcements and share price movements are related to the size of the organisation. Accounting information has been found for the most part to hugely affect the share price of smaller companies compared to larger companies. This is demonstrated on the premise that for bigger organisations, there is more information accessible in the market and consequently a more prominent probability that projections about income have as of now been appropriated in the share prices. This notion was supported by Grant (1980) who investigated the reaction of earnings announcements of companies listed on the New York Stock …show more content…
One of their studies had a sample of 22 FC and 22 SE companies with revenues higher than 50% in exploration and production activities. These companies share price returns were examined 11 weeks either side of the issue of SFAS19. Dyckman and Smith concluded the test found that FC companies were adversely affected in the short term; however, over the whole time period there was no statistical difference between FC and SE companies and therefore supported the argument that the standard did not affect share price. Contrary, Collins and Dent criticised this argument as they found Dyckman and Smith included Canadian companies trading in US markets in their sample size. This has the knock on effect of results concluding no statistical difference after the change in methods. This was due to the Canadian GAAP allowing companies to use both methods of accounting as acceptable practice. Collins and Dent study was extended to one year after the issue of SFAS19 and they reported over three, six and eight month periods, the average risk-adjusted return of the full cost firms was significantly less than that of successful efforts firms. This is also supported by Lev (1979) who thought a week is too long between price observations to the impact of SFAS19. He looked at 49