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Returns On Project-Financed Investments: Evolution And Managerial Implications

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  • Benjamin Esty
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    Abstract

    In the past, project finance was used primarily to fund relatively low-risk natural resource projects with highly predictable cash flows. Today project finance is used for a wide range of assets, such as satellite telecommunications systems, amusement parks, and microprocessor factories, and in developing as well as developed countries. The author explores how the evolution into riskier assets has changed expected returns on project-financed investments. Higher return variability and greater failure rates have caused project debt capacities to fall. What is notable about project-financed investments, however, is that the best returns are not very high. And because the nature of most projects limits the upside potential, a much higher fraction of project-financed investments must be successful for capital providers to earn acceptable returns on their investments. 2002 Morgan Stanley.

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    Bibliographic Info

    Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

    Volume (Year): 15 (2002)
    Issue (Month): 1 ()
    Pages: 71-86

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    Handle: RePEc:bla:jacrfn:v:15:y:2002:i:1:p:71-86

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=1078-1196

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    Cited by:
    1. Kumar, Rajesh & Rangan, U. Srinivasa & Rufín, Carlos, 2005. "Negotiating complexity and legitimacy in independent power project development," Journal of World Business, Elsevier, vol. 40(3), pages 302-320, August.
    2. Desai, Mihir A. & Fritz Foley, C. & Hines Jr., James R., 2008. "Capital structure with risky foreign investment," Journal of Financial Economics, Elsevier, vol. 88(3), pages 534-553, June.
    3. João Pinto, 2014. "What is Project Finance?," Working Papers de Economia (Economics Working Papers) 01, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).
    4. Vaaler, Paul M. & James, Barclay E. & Aguilera, Ruth V., 2006. "Risk and Capital Structure in Asian Project Finance," Working Papers 06-0127, University of Illinois at Urbana-Champaign, College of Business.
    5. Byoun, Soku & Xu, Zhaoxia, 2014. "Contracts, governance, and country risk in project finance: Theory and evidence," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 124-144.
    6. Marco Sorge & Blaise Gadanecz, 2004. "The term structure of credit spreads in project finance," BIS Working Papers 159, Bank for International Settlements.
    7. Francesco Corielli & Stefano Gatti & Alessandro Steffanoni, 2010. "Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1295-1320, October.

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