Shyam Venkatesan

Visiting Assistant Professor

A. B. Freeman School of Business
Tulane University


Real Options, Financial Constraints and Drilling Rig Rental Rates   (PDF)

We investigate the investment decisions of oil and gas companies using a unique measure of investment costs. Our contract level data highlights significant variation in rig rental rates that standard models of resource extraction do not account for. We characterize a simple real options model that provides novel insights into this variation. Our empirical analysis confirms that controlling for relevant economic variables, including level of oil price, oil price volatility has a causal negative affect on investment costs. Our results also show that larger firms, facing fewer financial frictions, are more forward looking, while smaller firms, who have less access to capital markets, are more dependent on their past earnings.