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Project-Specific External Financing and Headquarters Monitoring Incentives

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  • Laux, Christian

Abstract

This 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.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:jleorg:v:17:y:2001:i:2:p:397-412
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    Cited by:

    1. Guido Friebel & Mariassunta Giannetti, 2002. "Fighting for Talent: Risk-shifting, Corporate Volatility, and Organizational Change," CESifo Working Paper Series 793, CESifo Group Munich.
    2. 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.
    3. Edward M. Iacobucci & Ralph A. Winter, 2005. "Asset Securitization and Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 161-206, January.
    4. Mariassunta Giannetti & Guido Friebel, 2007. "Fighting for Talent: Risk-Taking, Corporate Volatility, and Organizational Change," 2007 Meeting Papers 263, Society for Economic Dynamics.
    5. 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.
    6. 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.
    7. Guembel, Alexander & White, Lucy, 2014. "Good cop, bad cop: Complementarities between debt and equity in disciplining management," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 541-569.
    8. Megginson, William L., 2010. "Introduction to the special issue on project finance," Review of Financial Economics, Elsevier, vol. 19(2), pages 47-48, April.

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