 Why explore for oil when it is cheaper to buy?Les Coleman () Applied Economics Letters, 2005, vol. 12, issue 8, 493-497 Abstract: 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. Date: 2005 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:12:y:2005:i:8:p:493-497 Ordering information: This journal article can be ordered from DOI: 10.1080/13504850500109733 Access Statistics for this article Applied Economics Letters is currently edited by Anita Phillips More articles in Applied Economics Letters from Taylor & Francis Journals |
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