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Optimal Capital Structure and Project Financing

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  • Salman Shah

    (University of Toronto)

  • Anjan V. Thakor

    (Washington University in St. Louis)

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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File URL: http://128.118.178.162/eps/fin/papers/0411/0411041.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0411041.

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Length: 35 pages
Date of creation: 29 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0411041

Note: Type of Document - pdf; pages: 35
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Web page: http://128.118.178.162

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References

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Citations

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Cited by:
  1. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.
  2. 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.
  3. 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.
  4. 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.
  5. Kleimeier, Stefanie & Versteeg, Roald, 2010. "Project finance as a driver of economic growth in low-income countries," Review of Financial Economics, Elsevier, vol. 19(2), pages 49-59, April.
  6. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics and Finance.
  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.
  8. 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.
  9. Megginson, William L., 2010. "Introduction to the special issue on project finance," Review of Financial Economics, Elsevier, vol. 19(2), pages 47-48, April.
  10. 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.
  11. 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).
  12. 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.
  13. 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.
  14. 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).
  15. An, Yunbi & Cheung, Keith, 2010. "Project financing: Deal or no deal," Review of Financial Economics, Elsevier, vol. 19(2), pages 72-77, April.
  16. 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.
  17. 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.
  18. Li, Jing & Sabbaghi, Navid, 2013. "Decision analysis on CDM project investments," International Journal of Production Economics, Elsevier, vol. 146(1), pages 269-280.

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