Domestic Factor MarketCcompetition and Firm Risk-Taking: Evidence from the US Oil and Gas Industry

Abstract

We explore how U.S. upstream oil and gas firms respond to domestic factor market competition that is centered on the finite proved reserves with their investment behaviors in domestic as well as in foreign countries. Our research delivers one clear message: firms engage in investment activities that enable them to avoid direct factor market competition. Within the domestic country, we conjecture that firms facing competition will increase their investment in riskier activities in pursuit of resources. Beyond the domestic country, firms are likely to escape competition by looking for opportunities abroad: yet they selectively do so by entering low-risk countries in search for resources. Once they enter low-risk countries, firms further engage in less international risk-taking activities. Empirical analyses testing our hypotheses corroborate our ideas.