Corporate risk-taking and performance: A 20 year look at the petroleum industry

This empirical study of the petroleum E&P sector investigates the financial risk tolerance of the 50 largest U. S.-based firms during the period 1981-2002. A decision analysis model is utilized to measure the financial risk tolerance of each firm for each year during the study period. Relationships between firm size and risk tolerance as well as foreign versus domestic risk propensity are analyzed. In addition, firms are compared in terms of their relative risk-taking by controlling for firm size. Finally, we present some other interesting statistical results that relate risk tolerance to performance. Firms in the high risk tolerance category perform significantly better than firms less willing to take financial risk. Implications from these findings are discussed in terms of E&P risk management and decision making.