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Optimal capital structure and project financing

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  • Shah, Salman
  • Thakor, Anjan V.

Abstract

We examine the financing and incorporation modes for new projects. There are two objectives. The first is to provide a theory of optimal capital structure that links risk, leverage, and value and is particularly applicable to large firms. Counter to conventional wisdom, we show riskier firms acquire more debt, pay higher interest rates, and have higher values in equilibrium. Second, we provide an economic rational for project financing which entails organizing a new project legally distinct from the firm's other assets. We explain why project financing involves higher leverage than conventional financing and why highly risky assets are project-financed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 42 (1987)
Issue (Month): 2 (August)
Pages: 209-243

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Handle: RePEc:eee:jetheo:v:42:y:1987:i:2:p:209-243

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Paul K. Chaney & Anjan V. Thakor, 2004. "Incentive Effects of Benevolent Intervention - The case of government loan guarantees," Finance 0411047, EconWPA.
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  9. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  10. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  11. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
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  13. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Talmor, Eli & Haugen, Robert & Barnea, Amir, 1985. "The Value of the Tax Subsidy on Risky Debt," The Journal of Business, University of Chicago Press, vol. 58(2), pages 191-202, April.
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  17. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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Citations

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Cited by:
  1. Li, Jing & Sabbaghi, Navid, 2013. "Decision analysis on CDM project investments," International Journal of Production Economics, Elsevier, vol. 146(1), pages 269-280.
  2. Giorgio Barba Navaretti & Giacomo Calzolari & Alberto Franco Pozzolo & Micol Levi, 2010. "Multinational Banking in Europe: Financial Stability and Regulatory Implications. Lessons from the Financial Crisis," Development Working Papers 292, Centro Studi Luca d\'Agliano, University of Milano, revised 30 Apr 2010.
  3. An, Yunbi & Cheung, Keith, 2010. "Project financing: Deal or no deal," Review of Financial Economics, Elsevier, vol. 19(2), pages 72-77, April.
  4. Kleimeier,Stefanie & William L. Megginson, 2002. "An empirical analysis of limited recourse project," Research Memorandum 066, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Ahron R. Ofer & Anjan V. Thakor, 2004. "A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchase and Dividends," Finance 0411031, EconWPA.
  6. Nanda, Vikram & Narayanan, M. P., 1999. "Disentangling Value: Financing Needs, Firm Scope, and Divestitures," Journal of Financial Intermediation, Elsevier, vol. 8(3), pages 174-204, July.
  7. Dailami, Mansoor & Hauswald, Robert, 2007. "Credit-spread determinants and interlocking contracts: A study of the Ras Gas project," Journal of Financial Economics, Elsevier, vol. 86(1), pages 248-278, October.
  8. Megginson, William L., 2010. "Introduction to the special issue on project finance," Review of Financial Economics, Elsevier, vol. 19(2), pages 47-48, April.
  9. Pierru, Axel & Roussanaly, Simon & Sabathier, Jérôme, 2013. "Capital structure in LNG infrastructures and gas pipelines projects: Empirical evidences and methodological issues," Energy Policy, Elsevier, vol. 61(C), pages 285-291.
  10. Hainz, Christa & Kleimeier, Stefanie, 2006. "Project Finance as a Risk-Management Tool in International Syndicated Lending," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 183, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  11. Bonetti, Veronica & Caselli, Stefano & Gatti, Stefano, 2010. "Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co," Review of Financial Economics, Elsevier, vol. 19(2), pages 60-71, April.
  12. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics and Finance.
  13. João Pinto & Mário Coutinho dos Santos, 2014. "Corporate Financing Choices after the 2007-2008 Financial Crisis," Working Papers de Economia (Economics Working Papers) 03, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).
  14. Kleimeier, Stefanie & Versteeg, Roald, 2009. "Project Finance as a Driver of Economic Growth in Low-Income Countries," Research Memorandum 011, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  15. 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.
  16. Marco Sorge & Blaise Gadanecz, 2008. "The term structure of credit spreads in project finance Supplementary material for this article can be found at http:||www.interscience.wiley.com|jpages|1076-9307|suppmat|ijfe.350.html," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 68-81.
  17. Dailami, Mansoor & Hauswald, Robert, 2001. "Contract risks and credit spread determinants in the international project bond market," Policy Research Working Paper Series 2712, The World Bank.
  18. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.

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