Project-Specific External Financing and Headquarters Monitoring Incentives
AbstractThis article analyzes the relationship between a firm's financing and its project incorporation decisions. It is shown that headquarters may have an incentive to carry out a new project within a subsidiary rather than within the existing firm. The project is partially financed through an external claim which is taken on by the subsidiary even though the parent corporation has sufficient funds to finance the project on its own. The reason for this is that reducing headquarters' claim on the project's cash flow may increase its incentive to monitor the quality of the project prior to making a continuation investment. This has positive incentive implications for the manager who is running the project. Copyright 2001 by Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Journal of Law, Economics and Organization.
Volume (Year): 17 (2001)
Issue (Month): 2 (October)
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- 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.
- Hainz, Christa & Kleimeier, Stefanie, 2012. "Political risk, project finance, and the participation of development banks in syndicated lending," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 287-314.
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