CPA-AGRC Distinguished Speaker Series and TRSS - Ioannis Tsalavoutas

In conjunction with the Telfer Research Seminar Series

***M.Sc. Students, this event can count towards one of the six mandatory Research Seminars Series needed to attend (MGT 6191/ MGT 6991 / MHS 6991).***

Ioannis Tsalavoutas, PhD

We examine whether the information with respect to capitalised exploration and evaluation (E&E) expenditures in extractive industry (EI) firms (firms in mining and oil & gas) is incorporated into lending decisions through the cost of 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. Consistent with our predictions, we find that firms with higher amounts of capitalised E&E expenditures exhibit lower cost of debt, suggesting that the intensity of E&E capitalisation amount provides value 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 recognise E&E capitalised expenditure holds for debt market participants.