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Optimal capital structure and project financing

  • Shah, Salman
  • Thakor, Anjan V.

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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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 42 (1987)
Issue (Month): 2 (August)
Pages: 209-243

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Handle: RePEc:eee:jetheo:v:42:y:1987:i:2:p:209-243
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
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  10. 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.
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  13. 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.
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