This article uses results of independent US oil companies to examine their decisions in a high-risk environment. When these companies seek to replace oil production, the available choices fall into two broad classifications, each with its own distribution of expected costs and returns: explore for oil; or buy proven oil reserves. Firms prove risk-sensitive in their decisions as the balance struck between building reserves by acquisition and by exploration responds to firm characteristics. The crossover from risk embrace (exploration) to risk aversion (acquisition) occurs when the probability of success from the more risky strategy drops below about 15%. This matches the behaviour of decision makers when facing risks as diverse as acquisitions and racetrack betting. Shareholders, however, do not support risk-taking for its own sake, although they bid up the price of successful risk-takers. This reveals a divergence in goals between principals and agents; and an inverse relationship between risk-taking and return as measured by shareholder value.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 12 (2005) Issue (Month): 8 (June) Pages: 493-497 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Related research
Keywords:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: