HARP Seminar, presented by Dr Dionysia Dionysiou: "Exploration and evaluation expenditures and the cost of debt financing"

Abstract

We examine whether the information about capitalised exploration and evaluation (E&E) expenditures in extractive industry (mining and oil and gas) firms is incorporated into lending decisions through the cost of debt financing. Additionally, we examine whether the accounting method applied for the capitalisation of these assets on the balance sheet (i.e., degree of the aggressiveness) affects the cost of debt financing. Consistent with our predictions, we find that firms with higher amounts of capitalised E&E expenditures exhibit lower cost of debt financing, suggesting that the intensity of E&E capitalisation provides relevant information that is priced by the debt market. In other words, capitalised E&E expenditure signals a reduced risk with regards to the future economic benefits associated with such expenditure and decreases debtholder downside risk. We further show that this effect is contingent upon the accounting method that firms apply. Specifically, we find that the positive effect of capitalised E&E expenditures is less pronounced for firms that use a more aggressive accounting method. This finding highlights the significant role that the diversity of accounting methods used to capitalise E&E expenditure holds for debt market participants. The study contributes to the financial accounting strand of the literature and has important practice and policy implications.

Short Bio on Presenter:

Dionysia is a senior lecturer in Accounting & Finance, at the University of Stirling. She is mainly working in three research areas:

1. Empirical corporate finance including seasoned equity offerings (SEOs) and capital structure, abnormal performance and long-run event studies/asset pricing models.
2. Corporate distress including bankruptcy prediction and strategies to avoid default.
3. Market based accounting/financial reporting including cost-of-equity, financial statement comparability, disclosures, earnings management and operating abnormal performance.

She has published in journals like Journal of Banking and Finance, Journal of Business Finance and Accounting, Accounting and Business Research, European Journal of Finance. Recently, Dionysia and colleagues got some funding from ACCA and in collaboration with Adam Business School they produced a series of financial reports about the disclosures of firms in extractive industries, in relation to their R&D, climate change, software development and carbon accounting. The paper she will present derives from one of the reports.