Accounting Research Journal

The value relevance of exploration and evaluation expenditures

Teng Zhou Jacqueline Birt Michaela Rankin
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Teng Zhou Jacqueline Birt Michaela Rankin , (2015),"The value relevance of exploration and
evaluation expenditures", Accounting Research Journal, Vol. 28 Iss 3 pp. 228 - 250
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ARJ
28,3
228
Received 10 September 2013
Revised 28 May 2014
Accepted 15 August 2014
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Accounting Research Journal
Vol. 28 No. 3, 2015
pp. 228-250
Emerald Group Publishing Limited
1030-9616
DOI 10.1108/ARJ-09-2013-0067
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1030-9616.htm
The value relevance of
exploration and evaluation
expenditures
Teng Zhou
Department of Accounting, Monash Business School, Monash University,
Melbourne, Australia
Jacqueline Birt
UQ Business School, University of Queensland, St Lucia, Australia, and
Michaela Rankin
Department of Accounting, Monash Business School, Monash University,
Melbourne, Australia
Abstract
Purpose This paper aims to investigate the value relevance of the various components of exploration
and evaluation expenditures in the Australian extractives industry. Whether exploration and
evaluation expenditures is more value relevant, following the adoption of AASB 6, and whether it
differs for firms engaged only in exploration when compared to those also engaged in mining
production is also examined.
Design/methodology/approach This paper uses a modified Ohlson model as a benchmark
against which to compare an alternative valuation model featuring the disclosed components of
exploration and evaluation expenditures. A sample comprising 430 firm-year observations between
2003 and 2009 is utilised.
Findings Written-off exploration and evaluation expenditures and the number of projects in which
firms are involved is relevant to investors when assessing the value of extractive firms. Further, the
implementation of AASB 6 has led to an improvement in the relevance of exploration and evaluation
information in assessing firm value.
Research limitations/implications The sample is based on observations from the years
2003-2004 to the years 2006-2009. The authors do not incorporate 2005, as this is the first year the new
standard was implemented, and there is the possibility of a settling in effect. The authors base our
sample on the top 100 extractive firms in 2009. As such, these companies may not represent the
accounting practices of smaller firms in the Australian extractive industry.
Originality/value The authors address a gap in the literature by examining the value relevance of
the detailed line items of exploration and evaluation expenditure reported by extractives firms. The
authors also explore the effect of regulatory changes by examining the value relevance of exploration
and evaluation expenditures pre- and post-International Financial Reporting Standards (IFRS)
6/Australian Accounting Standards Board (AASB) 6 implementation. Finally, the authors contribute
useful findings to the standard setters ongoing deliberations aimed at producing a comprehensive
standard on extractive activities by providing useful feedback on the relevance of accounting for
pre-production costs under a regime using the area of interest method.
Keywords Value relevance, IFRS, Extractives, Exploration and evaluation expenditures
Paper type Research paper
 1. Introduction Value
In this paper, we examine the value relevance of exploration and evaluation relevance
expenditures of Australian firms engaged in the extractives industry. A diversity of
approaches to account for and report the results of extractive operations have evolved
across the worlds major mining regions of Australia, Canada, South Africa, the UK and
the USA (Cortese et al., 2010)[1]. Recognising a need for increased comparability of
financial information, the International Accounting Standards Committee (IASC) 229
commenced a project to address the measurement and disclosure issues faced by the
industry. Of particular concern was the method used to account for pre-production
costs that is, exploration and evaluation expenditures[2] (IASC, 2000; Cortese et al.,
2010).
The International Accounting Standards Board (IASB) issued International
Financial Reporting Standards (IFRS) 6 Exploration for the Evaluation of Mineral
Resources in 2004, applicable from January 2005. This was subsequently adopted by the
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Australian Accounting Standards Board (AASB) and issued as AASB 6 Exploration for
the Evaluation of Mineral Resources, applicable the same year[3]. The accounting
standard represents an interim measure and focuses only on pre-production costs. The
attention on pre-production costs is likely to increase corporate focus on measurement
and disclosure of activities relating to these phases of operations, thus improving the
quality of disclosure. Further, AASB 6 provides greater detail on what should be
included in exploration and evaluation expenditure and the subsequent measurement of
capitalised exploration and evaluation expenditure. As a result, it could be argued that
AASB 6 takes a more rules-based approach than was evident in AASB 1022, and we
would anticipate an improvement in the disclosure and measurement of exploration and
evaluation expenditures, leading to more value-relevant information. Consequently, we
examine the relative value relevance pre- and post-adoption of AASB 6.
Investments in commodities are seen as attractive long-term investments, as they are
perceived to be a safe haven in times of economic crisis (Baurens, 2010, p. 7). Mining
and metals are amongst the best performing global equity sectors (Baurens, 2010).
However, valuing mining and exploration firms is complex. The sector is a dynamic
industry, which has an inherent high level of risk at each stage of activity (Wise and
Spear, 2002). Extractives firms experience the highest level of risk at the pre-discovery
or exploration stage. Exploration and evaluation costs can amount to hundreds of
millions of dollars, and for smaller exploration, firms can mean a significant drain on
resources during the exploration process (Cortese et al., 2010). In addition, expenditures
on exploration does not guarantee the discovery of a commercially exploitable reserve,
and in fact, only a small proportion of exploration programs ever culminate in a mine
development (Wise and Spear, 2002).
Knowledge about exploration activities is an important aspect in assessing firm
performance in the extractives sector. Exploration and evaluation activities can lead to
a range of possible outcomes for firms, from abandonment of the project, through to
development and production of an area of resource deposits. Therefore, due to the
uncertainty of exploration and evaluation, current earnings are unlikely to be indicative
of future earnings, thus conveying little information to assess the equity value of an
extractives firm (Wu et al., 2010).
The paper makes three contributions. First, we address a number of gaps in the
extant literature exploring value relevance of accounting information in the extractives
 ARJ industry. Prior research examining value relevance of exploration expenditures has
28,3 primarily been conducted in the US oil and gas industry (Berry and Wright, 2001;
Bryant, 2003), where accounting is subject to a different regulatory environment[4].
Australian research examining the extractives sector focuses on research and
development expenditures (Ahmed and Falk, 2006; Wu et al., 2010) or disclosure of
financial instruments (Hassan et al., 2006; Birt et al., 2013). We extend this research by
230 examining the value relevance of the detailed line items of exploration and evaluation
expenditures reported by extractives firms.
Second, we examine accounting practices in an industry of primary importance to
both the Australian economy and globally. The industry is one of the largest in
Australia, contributing approximately 9 per cent to Australias gross domestic product
(GDP) in 2009-2010 (Australian Bureau of Statistics, 2012). Sector exports have
accounted for over 35 per cent of Australias total receipts over the past three decades
(ASX, 2010). Australia is the worlds largest exporter of coal and iron ore (Business
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Monitor International, 2012). In the past decade, these exports have grown nearly
six-fold from $12 billion in 1999 to $69.4 billion in 2009 (DFAT, 2010).
Finally, findings of this research will provide useful feedback on the relevance of
accounting for pre-production costs accounted for on the area of interest basis. The
IASBs ongoing extractives project proposes one method for accounting for extractives
activities the area of interest approach, consistent with that currently used in
Australia. Consequently, research examining the relevance of accounting data
generated by firms in the Australian extractives industry will assist standard setters in
their deliberations on the development of a comprehensive standard on extractive
activities[5]. We also contribute to the ongoing development of IFRS more generally, by
examining the effect of an accounting standard that could be argued to be more
rules-based than its precursor.
We find that written-off exploration and evaluation expenditure is positively and
significantly associated with share price for extractive firms. The number of
projects in which a firm is currently involved is also important in assessing firm
value. When we compare the results between pre- and post-adoption of IFRS 6/
AASB 6, we find that the introduction of IFRS 6/AASB 6 has resulted in an
improvement of the relevance of exploration and evaluation expenditure in valuing
firms in the sector. Finally, in additional analysis, we find the value relevance of
exploration and evaluation expenditure differs across firms involved in exploration
and production activities.
The results of this research provide evidence that investors perceive written-off
exploration and evaluation expenditure to be relevant in assessing firm value. It is
also evident that transfers of capitalised expenditure to reserves are value relevant
for firms that engage in a large number of projects. Investors perceive this transfer
to reserves as being a positive outcome of projects with which sample firms are
engaged.
The remainder of the paper is structured as follows. Section 2 briefly outlines the
regulatory background to AASB 6 Exploration for and Evaluation of Mineral Resources.
Relevant research that has examined the value relevance of disclosures in the
extractives industry, and the development of hypotheses to test the relevance of
exploration and evaluation expenditure in valuing extractives firms, is presented in
Section 3. Section 4 discusses the research design and sample, while the results of
 statistical tests are presented in Section 5. Results of additional tests are discussed in the Value
penultimate section, with the paper concluding with limitations and suggestions for relevance
future research.

2. Background: accounting for exploration and evaluation expenditure in

Australia
Entities operating in the extractives industry are involved in the search for, and 231
extraction of natural resources, such as minerals, oil, natural gas and similar
non-regenerative resources (Appendix A, AASB 6). As previously indicated, AASB 6
Exploration for and Evaluation of Mineral Resources is developed from IFRS 6
Exploration for and Evaluation of Mineral Resources and adopts an area of interest
accounting method. The area of interest is defined as an individual geological area
that flows with natural resource minerals such oil and natural gas (AASB 6,
Appendix A, p 208). This approach is consistent with the precursor standard AASB
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1022 Accounting in the Extractive Industry, released in October 1989, following the
guidance in IFRS 6 permitting companies to continue to use their existing accounting
method. However, there have been changes to guidelines pertaining to disclosure and
measurement of exploration and evaluation expenditures.
First, AASB 6 provides clearer requirements regarding the recognition and
subsequent measurement of capitalised exploration and evaluation expenditures. It
requires that for each area of interest, the costs are either recognised as expenses as
incurred or capitalised if the conditions of AASB Paragraph 7 are met[6]. It also
requires that entities recognise the exploration and evaluation expenditure initially
at cost and in subsequent periods adopt either the cost or revaluation model. There
are also additional rules for subsequent reclassification of assets and also for testing
for impairment.
Second, AASB 6 provides greater detail on what should be included in exploration
and evaluation expenditure, including: acquisition of exploration rights, any expenses
directly relating to topography, geological, geochemical and geophysical studies,
drilling, trenching and sampling, any expenditure directly relating to evaluation and
extracting a mineral resource and any direct administrative expenses of the extractive
activities of the area of interest (AASB 6, Paragraph9). In summary, AASB 6 provides
additional detail on the recognition and subsequent measurement of the capitalised
asset and also the type of expenditure which would be classified as exploration and
evaluation expenditure. The standard could be argued as being more rules-based
compared to its precursor AASB 1022, as it demonstrates larger volumes of
implementation guidance and higher levels of detail (Schipper, 2003; Bennett et al.,
2006).
The IASBs project, aimed at developing a comprehensive standard for the extractive
industries, commenced with a discussion paper being issued in April 2010. The IASB
recognised the importance of the sector to the world economy and the major role
extractives firms play in the worlds capital markets (IASB, 2010a, 2010b)[7]. The
discussion paper provides results of the IASBs research and proposes one consistent
method for accounting for minerals and oil and gas activities.
As indicated previously, the discussion paper proposes the area of interest
approach, consistent with that currently used in Australia. As such, research examining
the relevance of accounting data generated by firms in the Australian extractives
 ARJ industry will provide useful feedback to standard setters on their ongoing development
28,3 of a comprehensive industry standard. The IASBs extractives project is currently
paused until it concludes deliberations on other accounting issues.

3. Literature review and hypothesis development

232 3.1 Prior research in the extractives sector
Several studies examining the extractives sector in the USA explore the value relevance
of disclosures. Berry and Wright (2001) find a positive association between the market
value of US oil and gas firms and their resource exploration and mining field
development disclosures. The authors examine whether disclosures under either the
full cost or successful efforts accounting methods convey relevant information
relating to oil and gas entities efforts and ability to discover reserves. The authors find
mining firms using the full cost approach provide value-relevant information on
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proven developed reserves and undeveloped reserves to the market, concluding that
disclosed exploration costs under a full cost method appears to be a positive signal to
investors about the future investment opportunities available to these firms.
In a similar vein, Bryant (2003) applies a valuation model to examine the association
between oil and gas firms market value and exploration and development costs. The
author claims that the full cost method of accounting for exploration and development
expenditures provides more relevant information than the successful efforts method.
Both Berry and Wright (2001) and Bryant (2003) find that disclosures by extractive
firms under the full cost accounting method convey value-relevant information to the
stock market.
Australian extractive industry studies contribute to our understanding of the
relevance of research and development (R&D) (Goodwin, 2002; Ahmed and Falk, 2006),
the disclosure of financial instruments (Hassan et al., 2006; Birt et al., 2013) and reserves
disclosures (Taylor et al., 2012) to the assessment of firm value. However, there is little
research solely focusing on the value relevance of exploration and evaluation
expenditures.
Wu et al. (2010) offer one exception when they investigate how disclosures
relating to exploration expenditures and R&D investment assist investors to
evaluate the value of loss-making Australian mining firms. In doing so, they also
compare the value relevance of capitalised and expensed R&D and exploration
expenditures of loss firms to those reported by profit firms. The authors find that
capitalised and expensed exploration and R&D costs are positively and
significantly associated with the market value of the resource-based firms reporting
losses. However, neither capitalised exploration expenditures nor R&D costs are
found to have any significant impact on the market value of profitable firms.
Further, where firms have a positive market value despite current losses, this is due
to the information provided by exploration expenditures as an indication of
expected future value. The authors primarily focus on reporting during the period
before AASB 6 adoption, with only one full year of their study considering
accounting subject to AASB 6. As such, we seek to extend the period and undertake
a more detailed analysis of the association between the disclosure of the various line
items required pursuant to AASB 6 and firm value of extractives firms[8].
 3.2 Hypotheses development Value
3.2.1 Exploration and evaluation expenditures. Exploration and evaluation relevance
expenditures contribute a large proportion of the total mining costs for companies
engaged in the exploration and evaluation phases of development. As previously
indicated, both Berry and Wright (2001) and Bryant (2003) find that exploration
expenditure disclosed by oil and gas firms that use the full cost approach is value
relevant to the market, which suggests that an oil and gas companies efforts 233
and ability to discover and extend proven reserves is useful in assessing firm
value.
Investors are likely to consider capitalisation of expenditures differently than those
that have been expensed (Aboody and Lev, 1998; Wu et al., 2010). Aboody and Lev (1998)
found that capitalising software development costs was more likely to reduce
information uncertainty for investors, leading to different relationships with share
returns. Mitrione et al. (2014) found differences in the value relevance of R&D expensed
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and capitalised for Australian Health sector firms in the periods prior, during and post
the GFC. Consistent with Wu et al. (2010) it is expected that capitalised exploration and
evaluation expenditures will provide value-relevant information for investors of
Australian extractives firms. Current capitalised exploration and evaluation
expenditures[9] convey positive information about the continuing mining operations
successful exploration for economic reserves and the likelihood of future development or
sale of mining projects, which are expected to recover the costs incurred during the
exploration and evaluation operations. Therefore, it is expected that the disclosure of
current capitalised exploration and evaluation expenditures will be value relevant to the
market.
Further, if capitalised exploration and evaluation expenditures are able to indicate
the extractive firms ability and efforts to discover proven mining reserves (Berry and
Wright, 2001), written-off exploration and evaluation expenditures[10] should also have
an impact on the value of these firms. The written-off expenditures are likely to be
considered as negative information indicating the likelihood of abandoning mining
tenements, oil and gas fields or mining projects, indicating the company sees little or no
value under present conditions. This provides a negative signal to investors about
future cash flows from these operations and is likely to be considered by investors in
valuing extractives firms. Prior research examining expensing of R&D (Ahmed and
Falk, 2006; Tsoligkas and Tsalavoutas, 2011) finds a negative association between R&D
expense and share price and argues this is reflective of non-profitable or unsuccessful
projects of the firm. This leads to our first hypothesis:
H1. Current capitalised exploration and evaluation expenditures (written-off
exploration and evaluation expenditures) will be positively (negatively)
associated with the share price of an extractives firm.
3.2.2 Number of projects. We not only anticipate exploration and evaluation
expenditures to be value relevant. Consistent with Amir and Lev (1996) and Trueman
et al. (2001), other financial report information is also likely to provide useful information
in analysing and evaluating the extractive firms future development. The number of
mining or exploration projects a firm is engaged in could provide information on the
ability of the firm to undertake current and future projects. Evidence that some of the
entitys projects have gone beyond the exploration and evaluation stage is a positive
 ARJ signal of the ability of the firm to successfully engage in the exploration process and
28,3 convert these projects to successfully mined tenements. Therefore, the second
hypothesis is:
H2. The number of mining projects will be positively associated with the share price
of an extractives firm.
234 3.2.3 Pre- versus post-AASB 6 adoption. Regulation is an important factor impacting on
the value relevance of publicly available information, and ultimately the usefulness of
financial information, in assessing current and future performance (Healy and Palepu,
2001). Compared to the previous standard (AASB 1022), AASB 6 provides more detailed
requirements for the disclosure of exploration and evaluation expenditures. Similarly,
Mitrione et al. (2014) found that after the implementation of tighter regulatory
requirements under IAS 38, reported R&D expenditure was more value relevant
compared to under AASB 1011. Based on the more extensive reporting guidelines of
AASB 6, we anticipate regulated entities place more focus on their reporting of
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exploration and evaluation expenditures, leading to an improvement in the disclosure

of exploration and evaluation expenditure. As a result, we anticipate information
asymmetry to be reduced, leading to higher value relevance post-adoption of AASB 6.
Therefore, we hypothesise:
H3. Exploration and evaluation expenditure reported after the implementation of
AASB 6 is more value relevant than exploration and evaluation expenditure
reported under AASB 1022.

4. Data and research method

4.1 Sample and data
The sample constitutes the top 100 firms in the extractives industry, identified from the
ASX, at January 2010. The market capitalisation of the top 100 firms ranges from $126
million to $132.23 billion, where the combined market capital of the sample is $270.03
billion, contributing 95.85 per cent of the total market capital ($282 billion) of the
industry. In total, 16 companies are excluded from the sample due to incomplete data.
Sample selection is summarised in Table I.

Explanation Sample firms Firm-year observations

Top 100 companies in metals and mining sectors

in 2010 100 600
Less Companies/firm-years not following AASB
6 standards (9) (54)
Less Companies/firm-years with insufficient
disclosures or missing data (7) (116)
Total companies/firm-year observations 84 430
Firm-years where engaged in exploration
activities only 247 (57.5%)
Firm-years where engaged in exploration and
Table I. production 183 (42.5%)
Sample selection and Firms-years with positive earnings 150 (35.9%)
characteristics Firm-years with negative earnings 280 (65.1%)
 We conduct our analysis using two specific time periods. During the first period Value
(2003-2004), sample firms are subject to the accounting requirements of AASB 1022 relevance
(pre-AASB 6). The second (2006-2009) represents the period post-implementation of
AASB 6. In total, there are 430 firm years in the sample, consisting of 112 firm years
from 2003 to 2004 and 318 firm years between 2006 and 2009.
Share price, earnings and earnings-per-share data are collected from Aspect Huntley Fin
Analysis. All other accounting data are hand-collected from annual reports retrieved 235
from Connect4 and Aspect Huntley Fin Analysis. The non-financial data are extracted
from the tenement statements, operation reviews, exploration and development reports,
directors reports and extracting (mining) projects reports all produced by sample
firms as part of their annual reports.

4.2 Research method

To test our hypotheses, we first use the Ohlson (1995) model as a benchmark against
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which to compare our alternative valuation model featuring the disclosed components of
exploration and evaluation expenditures. Model 1 represents the basic form of the
modified Ohlson (1995)[11] model:

P90 0 1EPSt 2BVE0t e (1)

where:
P90 the share price at 90 days after reporting date;
EPSt earnings per share in fiscal year t;
BVE0t book value of equity per share in fiscal year t; and
e error term.
To test our hypotheses, we include variables representing capitalised expenditures
EEEt and written-off exploration and evaluation expenditures WOFFt in an enhanced
model. Additionally, to test the value relevance of the number of mining projects (H2),
we include the variable (Projectst). To account for the time lag from reporting date to the
financial report release date, consistent with prior research (Barth et al., 1996; Ahmed
and Falk, 2006; Hassan et al., 2006), the dependent variable is the share price 90 days
after reporting date (P90). We also incorporate a revised earnings per share measure with
the written-off exploration and evaluation expenses added back (denoted EBTBWt), and
a revised book value of equity per share after capitalised exploration and evaluations
expenditures are added back (BVE1t).
Valuation models are often criticised as suffering from scale effects, which arise
because large (small) firms tend to also have large (small) market capitalisation, large
(small) book values and large (small) earnings (Ota, 2003; Barth and Clinch, 2009). To
address this issue, consistent with Barth and Clinch (2009) and Mitrione et al. (2014), we
use a deflated form of the model, where each variable is deflated by the number of shares
outstanding. Further, we control for the potential that value relevance could be due to a
general rise in resources prices over the sample period, by including a commodities
index (Comm_Indext), calculated as the average Reserve Bank of Australia (RBA) Index
of Commodities Prices each year.
Therefore, our test model, used to evaluate whether market participants use
exploration and evaluation disclosures to value extractives firms, is:
 ARJ P90 0 1EBTBWt 2BVE1t 3EEEt 4WOFFt
28,3 5Projectst 6Comm_Indext e (2)

where:
P90 the share price at 90 days after reporting date;
236 EBTBWt earnings (per share) before income tax adding back written off
value of exploration and evaluation expenses in fiscal year t;
BVE1t balance of book value of equity per share excluding EEEt at the
reporting dates in fiscal year t;
EEEt capitalised exploration and evaluation expenditures per share
in fiscal year t;
WOFFt written off exploration and evaluation expenditures per share
in fiscal year t;
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Projectst number of mining projects in fiscal year t;

COMM_Indext commodities index in fiscal year t; and
e error term.
Easton and Sommers (2003) suggest that the best measure of scale is market
capitalisation because of the central role market prices play in market-based accounting
research. Consequently, an alternative to the above price model is to use a returns model,
where the variables used in the model are deflated by the lagged market value of equity,
and are therefore scale-free (Ota, 2003). As such, we perform additional tests where we
use an alternative model, replacing the level variables with changes in these variables.
Aboody and Lev (1998); Tutticci et al. (2007) and Mitrione et al. (2014) also utilise this
method.
The model is presented in equation (3):

R90 0 EBTBWMVt 2EBTBWMVt 3EEEMVt

(3)
4WOFFMVt 5ln Projectst 6Comm_Indext e

where:
R90 market adjusted annual return at 90 days after reporting date;
EBTBWMVt earnings before income tax adding back written-off value of exploration
and evaluation expenses in fiscal year t;
EBTBWMVt change in earnings before income tax adding back written-off value of
exploration and evaluation expenses in fiscal year t;
EEEMVt capitalised exploration and evaluation expenditures in fiscal year t;
WOFFMVt written-off exploration and evaluation expenditures in fiscal year t;
Ln Projectst natural log of number of mining projects in fiscal year t;
COMM_Indext commodities index in fiscal year t; and
e error term.
All values (except the number of mining projects and commodities index) are deflated by
lagged market capitalisation of the firm at 90 days after reporting date.
 Variables Mean Median Maximum Minimum SD
Value
relevance
P90 2.093 0.780 43.160 0.010 4.725
EPSt 0.012 0.014 0.996 3.069 0.282
BVE0t 0.699 0.214 9.018 0.356 1.283
EBTBWt 0.144 0.007 5.244 0.392 0.558
BVE1t 0.587 0.141 8.415 0.591 1.175
EEEt 0.054 0.024 0.871 0.000 0.096
237
WOFFt 0.019 0.003 0.363 0.000 0.043
Projectst 7.761 5.000 69.000 1.000 8.987
Comm_Indext 81.565 81.200 111.0 49.6 20.925

Notes: n 430; variable definitions: P90 share price at 90 days after reporting date; EPSt
earnings per share in fiscal year t; BVE0t book value of equity in fiscal year t; EBTBWt earnings
(per share) before income tax, adding back written-off value of exploration and evaluation expenses in
fiscal year t; BVE1t balance of book value of equity per share excluding capitalised exploration and Table II.
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evaluation expenditure at reporting date in fiscal year t; EEEt capitalised exploration and evaluation Descriptive statistics:
expenditures per share in fiscal year t; WOFFt written-off exploration and evaluation expenditures dependent and
per share in fiscal year t; Projectst number of mining projects in fiscal year t; Comm_Index independent
commodities index variables

5. Results
5.1 Descriptive statistics
The descriptive data for all variables included in the basic Ohlson (1995) model and our
price model are presented in Table II. Data reveal large variation across the sample.
Share prices (P90) range from $0.01 to $43.16 with a mean of $2.09; earnings per share
(EPS) range from $3.09 to $0.97; while earnings before tax, adding back written-off
exploration and evaluation expenditure (EBTBWt) ranges from $0.39 to $5.24, with a
mean of $0.14. Capitalised exploration and evaluation expenditures (EEEt) ranges from
$0.00 to $0.87 per share. The mean is $0.05. Written-off exploration and evaluation
expenditures (WOFFt) range from $0.00 to $0.36 per share, with a mean of $0.02. Sample
firms engage in an average of 8 mining projects (mean 7.8), with a minimum of 1 and a
maximum of 69.
While tabulated statistics for capitalised (EEEt) and written-off (WOFFt) exploration
and evaluation expenditures (EEEt) are scaled by number of shares outstanding,
Figure 1 presents a graphical representation of total expenditures across the sample
firms. These reflect unscaled data. Both categories of expenditure exhibited substantial
increases in the first year AASB 6 was adopted (2006). Average written-off expenditure
(WOFF) increased from approximately $4 million in 2003 and 2004 to a high of over
$16million in 2006, declining thereafter. Capitalised expenditure (EEE) was more stable
across the sample period, but was generally higher after the adoption of AASB 6 than
prior.
Evidence of multicollinearity is determined by examining the correlations amongst
the independent variables. The correlation matrix, presented in Table III, shows that
almost all correlation coefficients are below 0.80, indicating no evidence of
multicollinearity (Gujarati, 2003). We also evaluate variance inflation factors (VIF) in
each regression model (unreported) and find that multicollinearity does not impact any
of our results[12].
 ARJ 18,000,000

28,3 16,000,000
14,000,000
12,000,000
10,000,000
EEE
238 8,000,000
WOFF
6,000,000
4,000,000
Figure 1. 2,000,000
Reported EEE and
-
WOFF over time
2003 2004 2006 2007 2008 2009
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Variable EBTBWt BVE1t EEEt WOFFt Projectst Comm_Index IFRS

EBTBWt 1.000
BVE1t 0.744 1.000
EEEt 0.301 0.278 1.000
WOFFt 0.363 0.286 0.115 1.000
Projectst 0.452 0.304 0.010 0.226 1.000
Comm_Index 0.027 0.061 0.043 0.031 0.062 1.000
IFRS 0.050 0.040 0.028 0.012 0.072 0.860 1.000

Notes: n 430; Pearsons correlation coefficients are presented; variable definitions: EBTBWt
earnings (per share) before income tax adding, back written-off value of exploration and evaluation
expenses in fiscal year t; BVE1t balance of book value of equity per share excluding capitalised
exploration and evaluation expenditure at reporting date in fiscal year t; EEEt capitalised exploration
and evaluation expenditures per share in fiscal year t; WOFFt written-off exploration and evaluation
Table III. expenditures per share in fiscal year t; Projectst number of mining projects in fiscal year t;
Correlation matrix Comm_Index commodities index; IFRS dummy variable indicating pre(post) IFRS adoption

Aside from IFRS and Comm_Index, the highest correlation is between EBTBWt and
BVE1t, where we document a correlation coefficient of 0.74. In further untabulated
results, we determine a correlation coefficient of 0.66 between book value of equity and
positive earnings and 0.49 between book value of equity and negative earnings. This
appears to be consistent with Collins et al. (1999) findings.

5.2 Results of hypotheses tests

Cross-sectional regression results under the modified Ohlson (1995) model and the price
models for exploration and evaluation expenditures are presented in Table IV. The
modified Ohlson (1995) model (Table IV, Model 1) shows that while book value of equity
is positively associated with share price three months after fiscal year-end for firms in
the mining sector (t-statistic 25.808), EPS are not (t-statistic 0.209). This presents
evidence of the limited relevance of earnings in assessing the value of extractives firms
and, particularly, those engaged in exploration activities.
We run our analysis on pooled data (2003 to 2009) to test H1 and H2. We test
hypothesis three in two ways: first, we run separate models on post-AASB 6 (2006-2009)
 Downloaded by 36.78.249.180 At 00:09 07 October 2016 (PT)

(1) (2) (3) (4) (5)

Pooled data Post-AASB 6 adoption Pre-AASB 6 adoption Pre-/post-AASB 6 adoption
Variable Ohlson model (2003-2009) (2006-2009) (2003-2004) (pooled data)

EPSt 0.108 (0.209)

BVE0t 2.916*** (25.808)
EBTBWt 2.620*** (7.628) 1.921*** (4.971) 2.484* (1.557) 2.396*** (6.950)
BVE1t 2.008*** (13.558) 2.311*** (13.609) 1.232*** (3.164) 2.005*** (13.787)
EEEt 1.896* (1.471) 0.872 (0.516) 1.001 (0.685) 3.005 (1.480)
WOFFt 12.699*** (4.360) 20.104*** (4.998) 2.637 (0.706) 1.585 (0.376)
Projectst 0.076*** (5.180) 0.101*** (4.790) 0.042*** (2.994) 0.074*** (5.090)
Comm_Index 0.009** (1.652) 0.038*** (3.375) 0.012 (0.161)
IFRS 0.503** (1.651)
EEEt IFRS 2.355 (0.922)
WOFFt IFRS 20.512*** (3.697)
Intercept 0.051 (0.316) 0.179 (0.984) 3.122*** (2.959) 0.700 (0.186) 0.622** (2.163)
F-statistic 355.827*** 208.247*** 191.664*** 29.475*** 169.353***
Adjusted R2 0.623 0.743 0.783 0.604 0.758
Observations 430 430 318 112 430

Notes: Coefficient (t-statistic); *** significant at 1% level; ** significant at 5% level; * significant at 10% level (one-tailed tests); P90 the share price at
90 days after reporting date; EPSt earnings per share in fiscal year t; BVE0t book value equity per share in fiscal year t. EBTBWt earnings (per share)
before income tax adding, back written-off value of exploration and evaluation expenses in fiscal year t; BVE1t balance of book value of equity per share
excluding capitalised exploration and evaluation expenditure at reporting date in fiscal year t; EEEt capitalised exploration and evaluation expenditures
per share in fiscal year t; WOFFt written-off exploration and evaluation expenditures per share in fiscal year t; Projectst number of mining projects in
fiscal year t; Comm_Index commodities index; IFRS dummy variable indicating pre- (post-) IFRS adoption
239

Price models
Table IV.
relevance
Value
 ARJ and pre-AASB 6 (2003-2004) data. We also incorporate a dummy variable (IFRS),
28,3 indicating post-AASB 6 adoption, and run the test on the pooled sample.
Our model on pooled data (Table IV Model 2) has greater explanatory power
(adjusted R2 0.743) than the basic Ohlson (1995) model (adjusted R2 0.623). This
provides initial support for our proposition that exploration and evaluation
expenditures, over and above financial earnings, are relevant to the market in assessing
240 firm value.
Confining our discussion to the test model, we find limited support for our first
hypothesis that capitalised exploration and evaluation expenditure is value relevant in
explaining the market value of firms in the extractive industry. Consistent with Wu et al.
(2010) and Aboody and Lev (1998), we find that EEEt is negatively associated with share
price, but only at the 10 per cent level. Recall that AASB 6 requires a number of
conditions to be met before exploration and evaluation expenditure can be capitalised,
including the expectation of recoupment through successful development and
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exploitation of the area of interest or by its sale (AASB 6 Paragraph Aus7.2).

Consequently, it is more likely that exploration expenditure will be expensed rather than
capitalised, particularly, during the exploration, as opposed to evaluation phase, where
firms face greater uncertainties pertaining to what resources might be underground.
Further, given the measure of EEE is a lagged measure indicating investment in
exploration and evaluation assets, the market may already have received and acted on
this information from other sources prior to the release of the annual reports. If this is the
case, you would expect to find reduced value relevance for this accounting
information[13].
In relation to written-off exploration and evaluation expenditures (WOFFt), contrary
to expectations, we find a positive association between written-off expenditures and
share price (t-statistic 4.360). While we expected written-off expenditures to present a
negative signal to investors about the potential for abandoning mining tenements, oil
and gas fields or mining projects, this result supports previous research by Wu et al.
(2010), who also observe a positive relationship between share prices and expensed
exploration and evaluation costs. It also supports sub sector (i.e. health care) results in
the Mitrione et al. (2014) study where expensed R&D was considered important for the
manufacturing of health care equipment or providing health care related services. In the
current study, the results indicate that the amount of exploration and evaluation
expenditure could represent expenditure likely to relate to future earnings potential.
While the exploration has not reached a stage whereby it meets the criteria for
capitalisation, the expenditure signals the extent to which the firm is engaged in
activities that are likely to lead to future successful production activities.
The significant positive result for Projectst at the 1 per cent level (t-statistic 5.180)
offers support for our second hypothesis that the number of projects in which a firm is
engaged provides relevant information on the ability of the firm to generate future
income. Consistent with Amir and Lev (1996); Trueman et al. (2001) and Wyatt (2008),
this indicates that non-financial report information is likely to be value relevant if it is
sufficiently salient to the firms economic reality and is informative about potential
future earnings[14]. The returns model (untabulated) shows that neither capitalised or
expensed exploration and evaluation expenditures are associated with share return
(t-statistics 1.079 and 1.056, respectively); however, consistent with the prices model
 reported in Table IV (Model 2), the number of mining projects is significantly positively Value
associated with share returns (t-statistic 5.205). relevance
To test H3, we first compute our models on both post-AASB 6 (Table IV Model 3) and
pre-AASB 6 implementation data (Table IV Model 4). The explanatory power of the
regression model is higher in the period after implementation of AASB 6 (adjusted R2
78.3 per cent) than prior to its adoption (adjusted R2 60.4 per cent). To determine whether
these models are significantly different from each other, we conduct a Chow (1960) test 241
to determine whether the coefficients in the regression models pre- and post-adoption of
AASB 6 are identical. We find that the coefficients, and therefore the explanatory power
of the models, differ (F-value 142.298, p 0.000).
We also test H3 by including a dummy variable representing pre- and post-AASB 4
adoption (IFRS) in the model and also interact this with EEEt and WOFFt (Table IV,
Model 5). The pre- and post-AASB 6 indicator variable is significant at the 1 per cent
level (t-statistic 3.783). Further, in support of our prior results, the interaction between
WOFFt and IFRS is significantly positive. This result shows that the association
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between WOFFt and the dependent variable (P90) is significantly greater in the
post-AASB 6 period than the pre-AASB period. The insignificant result with EEE again
reflects the fact that possibly the market may have already priced the EEE from other
sources. Consistent with Cooper and Keim (1983); Kothari (2001) and Healy and Palepu
(2001), our results indicate that, based on the more extensive guidelines of AASB 6, there
has been an improvement in the disclosure of exploration and evaluation expenditure,
leading to increased value relevance. This provides support for the third hypothesis.
Mitrione et al. (2014) find similar results regarding value relevance of R&D disclosures
in the Australian health-care industry.

5.3 Further tests

5.3.1 Profit and loss firms. Prior research has considered the value relevance of
accounting data for both profitable and unprofitable firms. Wu et al. (2010) find that
exploration expenditures are more likely to explain the share price of loss-making
Australian mining companies. To identify the value relevance of exploration and
evaluation expenditures across profit and loss firms, we split the sample into
profit-making and loss firms based on their EPS.
Our data consists of 150 observations with positive EPSt and 280 observations with
negative EPSt. Table V (Models 1 and 2, respectively) presents the results of our
analysis, where we report the adjusted R2 for the profitable firms (76.4 per cent) and loss
firms (31.5 per cent). Earnings (EBTBWt), book value BVE1t, and written-off (WOFFt)
exploration and evaluation expenditure are all significantly and positively associated
with the share price in both profit firm years and loss firm years. We find that capitalised
exploration and evaluation expenditure (EEEt) is more significantly and positively
associated with share price in loss firms (t-statistic 2.006) than for the pooled sample
presented in Table IV (Column 2). This is consistent with Wu et al.s (2010) findings, with
capitalised exploration and evaluation being able to explain the market value of
loss-making mining companies. Mitrione et al. (2014) find similar results for loss-making
firms in the Australian health-care sector. The number of mining projects (Projectst),
while positively related to share price of profitable firms, is not associated with the share
price of loss firms. This is likely to result from the fact that loss firms tend to be engaged
only in exploration activities, and thus have fewer, if any projects recorded.
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28,3
ARJ

242

Table V.
Additional tests
(1) (2) (3) (4)
Variable Profit firm years (positive EPS) Loss firm years (negative EPS) Exploration firms Exploration and production firms

EBTBWt 2.153*** (3.489) 1.999** (1.675) 2.759*** (4.984) 1.089*** (2.129)

BVE1t 2.201*** (8.682) 1.550*** (8.490) 0.419*** (5.231) 2.423*** (10.977)
EEEt 2.580 (0.925) 1.673** (2.035) 0.106 (0.116) 2.347 (1.050)
WOFFt 17.426*** (3.148) 4.900*** (2.314) 1.705 (0.991) 26.724*** (4.384)
Projectst 0.140*** (4.428) 0.007 (0.767) 0.008 (0.842) 0.157*** (5.429)
Comm_Index 0.017 (1.145) 0.002 (0.566) 0.008*** (2.17) 0.002 (0.140)
Intercept 2.817*** (2.173) 0.356 (1.335) 0.234 (0.793) 1.576 (1.595)
F-statistic 81.332*** 22.475*** 13.972*** 127.062***
Adjusted R2 0.764 0.315 0.224 0.806
Observations 150 280 247 183

Notes: Coefficient (t-statistic); *** significant at 1% level; ** significant at 5% level; * significant at 10% level (one-tailed tests); P90 the share price at
90 days after reporting date; EPSt earnings per share in fiscal year t; BVE0t book value equity per share in fiscal year t. EBTBWt earnings (per share)
before income tax adding, back written-off value of exploration and evaluation expenses in fiscal year t; BVE1t balance of book value of equity per share
excluding capitalised exploration and evaluation expenditure at reporting date in fiscal year t; EEEt capitalised exploration and evaluation expenditures
per share in fiscal year t; WOFFt written-off exploration and evaluation expenditures per share in fiscal year t; Projectst number of mining projects in
fiscal year t; Comm_Index commodities index
 5.3.2 Production firms versus exploration firms Value
Our initial sample consists of both production and exploration firms. The extent to relevance
which exploration firms maintain a capitalised exploration and evaluation assets
balance is likely to present significant information to investors relating to the imminent
discovery of viable reserves. However, we would expect both capitalised and written-off
exploration and evaluation expenditure to be more value relevant for production firms
than for exploration firms, given the uncertainty associated with exploration 243
activities[15]. To test this, we split our sample into production and exploration firms.
Results presented in Table V (Models 3 and 4) show that our model comprising
production firms (adjusted R2 80.6 per cent) significantly exceeds that for exploration
firms (adjusted R2 22.4 per cent). A Chow (1960) test indicates the models are
significantly different (F-value 148.795, p 0.000). We also note that for our exploration
firm model, only earnings and book value provide information relevant in valuing
shares of sample firms. This result points to the difficulty in valuing exploration firms,
which often operate under differing objectives than firms that develop mining
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tenements through to production.

5.3.3 Sensitivity tests

We also conduct a number of sensitivity tests including: assessing the impact of
transfers to reserves on share price, using the share price at reporting date as the
dependent variable, examining the sub-sample of firms that engage in write-offs of
exploration and evaluation expenditure, and substituting original values of EPS and
BVE. While we discuss each of our sensitivity results below, results are untabulated.
An important consideration for any extractives firm is the number of mining projects
it is currently engaged in. These projects can involve both risks and returns for the firm.
In this paper we have already shown a positive and significant association between the
number of mining projects and share price. If an extractives firm is successful with its
projects, it will transfer the capitalised amount to reserves. These transfers are expected
to have a positive impact on share price. We did not consider transfers to reserves in our
main tests, as AASB 6 does not govern the requirements for measurement and
disclosure of this figure. Taylor et al. (2012) note reporting of reserve information is
value relevant, particularly given the importance of reserves to resource firms in
achieving forecasted cash flows, meeting debt covenant terms and in achieving growth
forecasts. Disclosure of reserve estimates is important to investors in making informed
economic decisions about the underlying value of extractives firms (Taylor et al., 2012).
Therefore, as a sensitivity test, we introduce an interaction variable, where we interact
the number of mining projects with transfers of capitalised expenditure to reserves. We
find positive and significant results for our interaction variable. It appears that investors
do value information regarding the number of projects in which a firm is engaged, and
this combined with transferring capitalised amounts to reserves, further highlights
investor confidence in the firm.
We also rerun our models and substitute the 90-day share price with share price at
reporting date as the dependent variable. All variables except EEEt are highly
significant in the regression model with pooled sample data. The substitution of current
share price does not appear to have an impact on the explanatory power of the model. In
all tests, the model that features exploration and evaluation variables still performs
better than the basic modified Ohlson (1995) model using share price at reporting date.
 ARJ Finally, we substitute alternative proxies for EPS and BVE in the model featuring
28,3 exploration and evaluation expenditures. Recall, the original model incorporated an
adjustment to both EPS and BVE where we add back write-offs to earnings, and subtract
capitalised exploration and evaluation expenditures from BVE. Therefore, in this sensitivity
test, the original values of EPS and BVE are used. The explanatory power (adjusted R2)
under this model is slightly lower than the explanatory power of the regression model
244 without using the normal EPSt and book value equity (unreported results).

6. Conclusion
Valuing mining and exploration firms is complex. The sector is dynamic, with an inherently
high level of risk at each stage of activity (Wise and Spear, 2002). Extractives firms
experience the highest level of risk at the pre-discovery or exploration stage. Exploration and
evaluation costs can amount to hundreds of millions of dollars, and for smaller exploration
firms can mean a significant drain on resources during the exploration process (Cortese et al.,
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2010). Knowledge about exploration activities is important when assessing firm

performance in the extractives sector. Mining companies invest heavily in exploration
activities, which is likely to add value to the firm. Exploration and evaluation can lead to a
range of possible outcomes, from abandonment of the project, through to development and
production of an area of resource deposits. Therefore, due to the uncertainty of exploration
and evaluation activities, current earnings are unlikely to be indicative of future earnings,
thus conveying little information to assess the equity value of an extractives firm (Wu et al.,
2010).
This paper investigates the value relevance of disclosed exploration and evaluation
expenditures. The paper makes three contributions. First, we address a gap in the
literature by examining the value relevance of the detailed line items of exploration and
evaluation expenditure reported by extractives firms. Second, we explore the effect of
regulatory changes (Healy and Palepu, 2001) by examining the value relevance of
exploration and evaluation expenditures pre- and post-IFRS 6/AASB 6 implementation.
Finally, we contribute useful findings to the standard setters ongoing deliberations
aimed at producing a comprehensive standard on extractive activities by providing
useful feedback on the relevance of accounting for pre-production costs under a regime
using the area of interest method.
The paper contributes three main findings to the value relevance literature on
Australian extractive industries. First, we show that exploration and evaluation
expenditures (both capitalised and written-off exploration and evaluation expenditures)
are relevant to investors when assessing the value of extractive firms. While capitalised
expenditures are marginally significant, expensed exploration and evaluation costs
exhibit a strong positive significant association with firm valuation. While contrary to
our predicted direction, this result supports Wu et al.s (2010) findings of a positive
association between exploration and evaluation expenses and share price. Rather than
signalling abandonment of mining tenements and projects, our results indicate that the
expenditure signals the extent to which the firm is engaged in activities that are likely to
lead to future successful production activities.
Additional report information, in the form of the number of projects also assists in
providing relevant information for investors. Consistent with Amir and Lev (1996),
Trueman et al. (2001) and Wyatt (2008), this result indicates that non-financial
information is likely to be value relevant if it is sufficiently salient to the firms economic
 reality and is informative about potential future earnings. Third, the implementation of Value
AASB 6 has led to an improvement in the relevance of exploration and evaluation relevance
information in assessing firm value. Consistent with Cooper and Keim (1983); Kothari
(2001) and Healy and Palepu (2001) our results indicate that, based on the more extensive
guidelines of AASB 6, there has been an improvement in the disclosure of exploration
and evaluation expenditure, leading to increased value relevance. In additional analysis,
we find that exploration and evaluation data is more relevant in valuing production 245
firms than those purely engaged in exploration. This result points to the difficulty in
valuing exploration firms, which often operate under differing objectives than firms that
develop mining tenements through to production.
The disclosure of exploration and evaluation expenditure appears to assist users
in making decisions about extractives firms in terms of the assessment of current
financial performance and financial position, and also in forecasting future
performance and financial position. This is particularly important in the extractives
sector, where book values and earnings provide limited information with which to
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assess the future success of a firm. It also supports previous research observing that
changes in accounting regulation have consequences for value relevance (Cooper
and Keim, 1983; Healy and Palepu, 2001; Goodwin, 2002; Ahmed and Falk, 2006;
Mitrione et al., 2014).
As with all such research, our study suffers from some limitations. The sample is
based on observations from the years 2003-2004 and the years 2006-2009. We do not
incorporate 2005 as this is the first year the new standard was implemented and there is
the possibility of a settling in effect. We base our sample on the top 100 extractive firms
in 2009. As such, these companies may not represent the accounting practices of smaller
firms in the Australian extractive industry.
We offer several suggestions for future research. Future research could address
the previously identified limitations by increasing the observation period and
sample size. Studies could specifically look at smaller mining firms versus larger
firms and examine the respective value relevance of different exploration and
evaluation variables. In addition, future studies could examine the value relevance
of the impairment of capitalised exploration and evaluation assets. One alternative
explanation for the difference in value relevance pre- and post-IFRS adoption could
be that this period coincides with a mining boom, resulting in increases commodity
prices from 2006-2008. While we have partially controlled for this by incorporating
a resources index in our models, future research could more comprehensively
examine this event.
Finally, a comparison with practices in other countries that have implemented IFRS
6 would usefully add to our understanding of the value relevance of exploration and
evaluation expenditures on a global scale, and thus contribute to the standard setters
future development of a comprehensive extractives activities standard.

Notes
1. While there is a range of methods used, the two main methods that have developed over
time are referred to as the successful-efforts method and the full-cost method (IASB,
2010a, 2010b).
2. Firms in the extractives sector engage in activities across four phases exploration or
searching for natural resources, evaluation of the quality, quantity and economic viability of
 ARJ explored resources, development of infrastructure necessary to extract resources and
28,3 production of resources (IASB, 2010a, 2010b).
3. Our study examines accounting for exploration costs by Australian firms. Consequently, any
further references to the standard will be to the Australian AASB 6 Exploration for the
Evaluation of Mineral Resources rather than IFRS 6.

246 4. One recent study examines the influence of IFRS regulation on financial reporting by
companies in the Turkish extractives industry (Zarapinar et al., 2012). In an effort to assess
the impact of differences in accounting culture on disclosure, the authors compared the degree
of comparability between the top five Turkish and the top five global extractives firms. The
study reveals that the global firms are more likely to adhere to the requirements of IFRS 6 than
their Turkish counterparts (Zarapinar et al., 2012).
5. The IASBs extractives project is currently on hold until decisions are made concerning a
range of other accounting issues.
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6. Capitalised expenditures should only be allocated to mineral resources in the areas of

interest in which the legal rights to tenure are current and a least one of: (i) the exploration
and evaluation expenditures are expected to be recouped through successful
development and exploitation of the area of interest, or alternatively, by its sale; and (ii)
exploration and evaluation activities have not reached a stage which permits a reasonable
assessment of the existence or otherwise of economically recoverable reserves, and active
and significant operations in, or in relation to, the area of interest are continuing (AASB
6, 2004, para.7).
7. The discussion paper addresses the following issues (IASB, 2010a, 2010b): how to estimate
and classify the quantities of minerals or oil and gas discovered, how to account for minerals
or oil and gas properties, how minerals or oil and gas properties should be measured and what
information about extractive activities should be disclosed.
8. As previously indicated, Wu et al. (2010) examine only the net value of exploration and
evaluation expenditures and do not consider the current capitalised or written-off line items.
9. Current capitalised exploration and evaluation expenditures constitute those expenditures
capitalised in the current period.
10. The written-off exploration and evaluation expenditures is recognised in the income
statement as exploration and evaluation expenses or similar. These constitute either direct
write-off of expenses in the current operating period or disposal of assets previously
capitalised to the exploration and evaluation expenditure asset account.
11. The modified Ohlson (1995) model is used in prior value-relevance studies (Berry and Wright,
2001 and Tsoligkas and Tsalavoutas, 2011) to test the value relevance of exploration costs.
12. Kutner et al. (2004) note that a variance inflation factor of ten or above indicates that
multicollinearity may be present, but levels over four should be investigated. VIFs range
between 1.131 and 1.294. Accordingly, multicollinearity is not deemed to be an issue in our
models.
13. We thank an anonymous referee for highlighting this potential reason for our lack of a
substantive result here.
14. A limitation with measuring the number of mining projects as other financial report
information is the measure could be proxying for firm size. In additional tests, we deflate
 Projectst by the number of shares outstanding and the results still hold. Further, when Value
Projectst is removed from the regression, our main results for H1 still hold.
relevance
15. We differentiate firms engaged in production activities from those only engaged in
exploration in two ways. First, we examine the segment reports for information indicating
engagement in both production and exploration activities, and those only engaged in
exploration. We confirm these by following Ferguson et al. (2011) and identifying sales
revenue greater than 5 per cent of market capitalisation. 247
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Corresponding author
Jacqueline Birt can be contacted at: j.birt@business.uq.edu.au

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