Corporate risk tolerance assessment : a case of petroleum E&P firm in Thailand

Abstract

In this study, the risk tolerance concept is applied to improve the investment appraisal decision-making in petroleum E&P industry in Thailand. Since the traditional decision analysis approaches used today do not adequately take the financial risk attitude of a decision-maker into account. This causes an error in the investment appraisal decisions. This study aims to assess the financial risk tolerance of E&P firm as well as the consistency in financial risk–taking by using the concept of risk preference theory. The corporate risk tolerance is assessed by developing the model of the hypothetical investment decisions in a form of questionnaire. That hypothetical questionnaire is created based on the assumption of the exponential utility function. The questionnaire consists of twelve differently hypothetical risky projects. The assessment is then applied to assist the firm in establishing the firm risk policy, preventing a decision maker makes the decisions against the risk strategy of the firm. The results imply that there are differences in risk tolerance among the personnel who take charge in the same administrative level. The personnel in high management level are more consistent in risk taking than the lower level since they have more working experiences in decision-making. The personnel in the technical level have relatively small differences in risk tolerance but they are very inconsistent with their risk taking when compare to the personnel in the management level. This can be because that they lack of experiences in decision making.