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Optimal Capital Structure and Project Financing

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Author Info
Salman Shah (University of Toronto)
Anjan V. Thakor (Washington University in St. Louis)

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

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

Note: Type of Document - pdf; pages: 35
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Web page: http://129.3.20.41

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G - Financial Economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
  5. Chaney, Paul K. & Thakor, Anjan V., 1985. "Incentive effects of benevolent intervention : The case of government loan guarantees," Journal of Public Economics, Elsevier, vol. 26(2), pages 169-189, March. [Downloadable!] (restricted)
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  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  7. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March. [Downloadable!] (restricted)
  8. Talmor, Eli & Haugen, Robert & Barnea, Amir, 1985. "The Value of the Tax Subsidy on Risky Debt," Journal of Business, University of Chicago Press, vol. 58(2), pages 191-202, April. [Downloadable!] (restricted)
  9. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March. [Downloadable!] (restricted)
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  10. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 415-32, July. [Downloadable!] (restricted)
  11. Joseph E. Stiglitz, 1972. "Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 458-482, Autumn. [Downloadable!] (restricted)
  12. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July. [Downloadable!] (restricted)
  13. Kim, E Han, 1978. "A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity," Journal of Finance, American Finance Association, vol. 33(1), pages 45-63, March. [Downloadable!] (restricted)
  14. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May. [Downloadable!] (restricted)
  15. Heinkel, Robert, 1982. " A Theory of Capital Structure Relevance under Imperfect Information," Journal of Finance, American Finance Association, vol. 37(5), pages 1141-50, December. [Downloadable!] (restricted)
  16. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January. [Downloadable!] (restricted)
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  17. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September. [Downloadable!] (restricted)
  18. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christa Hainz & Stefanie Kleimeier, 2004. "Political Risk in Syndicated Lending:Theory and Empirical Evidence Regarding the Use of ProjectFinance," Departmental Working Papers 197, Tor Vergata University, CEIS. [Downloadable!]
  2. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA. [Downloadable!]
    Other versions:
  3. Marco Sorge & Blaise Gadanecz, 2008. "The term structure of credit spreads in project finance

    Supplementary material for this article can be found at ," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 68-81. [Downloadable!]

  4. Fohlin, Caroline, 1998. "Financing Decisions and Corporate Capital Structure in the Later Stages of the German Industrialization," Working Papers 1030, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  5. Christa Hainz & Stefanie Kleimeier, 2006. "Project Finance as a Risk-Management Tool in International Syndicated Lending," Discussion Papers 183, 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. [Downloadable!]
  6. 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. [Downloadable!]
  7. 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. [Downloadable!]
    Other versions:
  8. 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!]
  9. Miglo, A., 2008. "Project Financing Versus Corporate Financing Under Asymmetric Information," Working Papers 2008-12, University of Guelph, Department of Economics. [Downloadable!]
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