We operationalize these notions in the context of the oil industry. The required disclosure of proved oil reserves under FASB Statement No. 69 is an example of repackaged information, because proved reserves are used to compute depletion on producing wells. A laboratory market design allows us to investigate market reactions to these disclosures under true ceteris paribus conditions. We conduct 20 markets involving 160 participants. Markets vary along five disclosure conditions, with each condition offering a unique combination of supplemental disclosures to accompany income statements and balance sheets for eight hypothetical oil firms.
Results indicate three primary findings.
First, market adjustments are more complete when oil reserves are explicitly disclosed, even if the same information can be inferred from depletion measures in the primary financial statements. Second, the one-sided disclosure of upside potential in oil reserves skews prices upwards, especially when overall prospects for a firm are unfavorable. Third, a more balanced disclosure of both upside potential and downside risk removes any such upward price bias. The latter two findings are more pronounced in market prices than in individual predictions of those prices, indicating that a laboratory market approach can offer incremental insights. Together, these findings suggest that with respect to supplemental performance disclosures, markets may be more reflective of bounded rationality than informational efficiency.