Law and Project Finance
45 Pages Posted: 27 Aug 2007 Last revised: 15 Aug 2014
Date Written: January 14, 2014
Abstract
We investigate Project Finance as a private response to inefficiencies created by weak legal protection of outside investors. We offer a new illustration that law matters by demonstrating that for large investment projects, Project Finance provides a contractual and organizational substitute for investor protection laws. Project Finance accomplishes this by making cash flows verifiable through two mechanisms: (i) contractual arrangements made possible by structuring the project within a single, discrete entity legally separate from the sponsor; and (ii) private enforcement of these contracts through a network of project accounts that ensures lender control of project cash flows. Comparing bank loans for Project Finance with regular corporate loans for large investments, we show that Project Finance is more likely in countries with weaker laws against insider stealing and weaker creditor rights in bankruptcy. We identify the predicted effects using difference-in-difference and triple-difference tests that exploit exogenous country-level legal changes and inter-industry differences in free cash flow and tangibility of assets.
Keywords: Agency Cost, Bankruptcy Cost, Corporate Finance, Free Cashflow, Investor Protection, Leverage, Limited Recourse, Project Finance, Self-Dealing
JEL Classification: G32, G33, G34, K22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Hayne E. Leland and Jure Skarabot
-
Infrastructure Project Finance and Capital Flows: A New Perspective
By Mansoor Dailami and Danny Leipziger
-
The Term Structure of Credit Spreads in Project Finance
By Blaise Gadanecz and Marco Sorge
-
Government Support to Private Infrastructure Projects in Emerging Markets
By Mansoor Dailami and Michael U. Klein
-
Project Finance as a Risk-Management Tool in International Syndicated Lending
By Christa Hainz and Stefanie Kleimeier
-
Risk, Taxpayers, and the Role of Government in Project Finance
-
The Emerging Project Bond Market: Covenant Provisions and Credit Spreads