Ex ante risk propensity and firm performance: A study of the petroleum exploration industry

A fundamental component of strategic management research is the analysis of decisions a firm makes about maximizing the usefulness of its resources. Of special significance is the relationship between resource allocation decisions under conditions of uncertainty (which are explicitly or implicitly guided by the firm's risk preferences) and the concomitant performance outcomes. This dissertation is concerned with the fundamental question of whether, in the context of firm performance, corporate risk attitudes matter.;In the decision making context, risk is an ex ante concept; however, it generally is measured in empirical work after the event (ex post), through such measures as variance of returns. Analysis of ex post risk and return measures from the same time period makes it impossible to discriminate between cause and effect. In contrast, this study develops a reasonable ex ante risk propensity construct based on the firm's actual capital allocations under conditions of risk and uncertainty. This decision analysis/utility theory formulation is designed to capture the firm's risk taking behavior in the form of an "implied" utility function.;Findings concerning the relationship between the firm's implied utility function and dimensions of strategic performance, including ex post risk and return, are investigated. The sample of firms studied is taken from the petroleum exploration industry. The implications for strategic management researchers concerned with risk/return relationships, as well as those individuals concerned with corporate risk management are discussed.