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Project financing: Deal or no deal

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  • An, Yunbi
  • Cheung, Keith
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    Abstract

    Most research on project financing focuses mainly on structuring and financing issues. In this paper we propose a model that incorporates the effects of the management efforts on market outcomes in its framework. Thus, we can examine project financing from the perspective of managerial incentives. The model highlights a set of conditions under which corporations prefer off-balance-sheet project financing. The choice is driven by the required amount of investment and the extent of uncertainty. Companies tend to choose project financing when managers' efforts have a significant impact on the magnitude and likelihood of favorable outcomes. Further, the larger the capital amount, the more likely it is that companies will use outside project financing.

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    File URL: http://www.sciencedirect.com/science/article/B6W61-4VSB1F9-1/2/e86b819c1be69927ce5eeea36d6dad2f
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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (April)
    Pages: 72-77

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    Handle: RePEc:eee:revfin:v:19:y:2010:i:2:p:72-77

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Project finance Internal corporate finance Managerial incentives Capital investment;

    References

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    1. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
    2. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December.
    3. Robert Parrino & Allen M. Poteshman & Michael S. Weisbach, 2005. "Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects," Financial Management, Financial Management Association, vol. 34(1), Spring.
    4. Shah, Salman & Thakor, Anjan V., 1987. "Optimal capital structure and project financing," Journal of Economic Theory, Elsevier, vol. 42(2), pages 209-243, August.
    5. Richard A. Brealey & Ian A. Cooper & Michel A. Habib, 1996. "Using Project Finance To Fund Infrastructure Investments," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 25-39.
    6. Blanchard, Olivier Jean & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 1994. "What do firms do with cash windfalls?," Journal of Financial Economics, Elsevier, vol. 36(3), pages 337-360, December.
    7. Chemmanur, Thomas J. & John, Kose, 1996. "Optimal Incorporation, Structure of Debt Contracts, and Limited-Recourse Project Financing," Journal of Financial Intermediation, Elsevier, vol. 5(4), pages 372-408, October.
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    Cited by:
    1. Megginson, William L., 2010. "Introduction to the special issue on project finance," Review of Financial Economics, Elsevier, vol. 19(2), pages 47-48, April.

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