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Project Finance as a Risk-Management Tool in International Syndicated Lending

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Author Info
Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich. christa.hainz@lrz.uni-muenchen.de)
Stefanie Kleimeier (Limburg Institute of Financial Economics, FdEWB, Maastricht University, P.O. Box 616, 6200 MD Maastricht, Netherlands. s.kleimeier@finance.unimaas.nl)

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Abstract

We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower’s home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we find overall support for our model and provide evidence that multilateral development banks act as “political umbrellas”.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 183.

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Date of creation: Dec 2006
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Handle: RePEc:trf:wpaper:183

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Related research
Keywords: project finance syndicated loans political risk double moral hazard

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  1. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 213-32. [Downloadable!] (restricted)
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  3. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, 06. [Downloadable!] (restricted)
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  4. Marco Sorge & Blaise Gadanecz, 2004. "The term structure of credit spreads in project finance," BIS Working Papers 159, Bank for International Settlements. [Downloadable!]
  5. Shah, Salman & Thakor, Anjan V., 1987. "Optimal capital structure and project financing," Journal of Economic Theory, Elsevier, vol. 42(2), pages 209-243, August. [Downloadable!] (restricted)
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  6. Manove, Michael & Padilla, Atilano Jorge & Pagano, Marco, 2000. "Collateral Vs. Project Screening: A Model Of Lazy Banks," CEPR Discussion Papers 2439, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Laux, Christian, 2001. "Project-Specific External Financing and Headquarters Monitoring Incentives," Journal of Law, Economics and Organization, Oxford University Press, vol. 17(2), pages 397-412, October.
  8. 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. [Downloadable!] (restricted)
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  9. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May. [Downloadable!] (restricted)
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  10. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September. [Downloadable!] (restricted)
  11. Holmstrom, Bengt, 1996. "Financing of Investment in Eastern Europe: A Theoretical Perspective," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 205-37.
  12. Kleimeier,Stefanie & William L. Megginson, 2002. "An empirical analysis of limited recourse project," Research Memoranda 066, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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