Risk and Capital Structure in Asian Project Finance

26 Pages Posted: 29 Nov 2008 Last revised: 22 Jun 2016

See all articles by Paul M. Vaaler

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Barclay E. James

Louisiana State University - E.J. Ourso College of Business

Ruth V. Aguilera

Northeastern University - Department of International Business and Strategy

Date Written: March 1, 2008

Abstract

We develop and test hypotheses derived from a multi-level theoretical framework for understanding factors shaping the credit risk and capital structure of a quintessentially Asian form of investment known as project finance. It differs from other corporate financing approaches. A project company is separate and bankruptcy remote from the investing firm sponsors that create it. The project company relies extensively on debt capital provided by creditors to fund project operations. Creditors provide more (less) debt as a percentage of overall project capital when there is less (more) risk of project failure and non-repayment. We define a target risk framework identifying country-, industry-, syndicate-, firm-, and project-related factors shaping Asian project finance company credit risk and thus, project debt. In a sample of 238 project finance companies announced in 13 Asian countries from 1995-2004, we observe substantial effects on project capital structure with respect to country-level factors linked to institutional and macroeconomic theories, syndicate structure factors linked to agency theory, and lead sponsor experience and project size factors linked to learning and transaction cost theories. We argue that these and other determinants of project finance company credit risk and capital structure in Asia since the mid-1990s anticipate similar relationships now emerging elsewhere around the globe.

Keywords: project finance, foreign direct investment, risk, capital structure, governance, institutions

JEL Classification: F20, F23, G30, G32, G34, G38, K12, K22, K42, M10, P16, P51

Suggested Citation

Vaaler, Paul M. and James, Barclay E. and Aguilera, Ruth V., Risk and Capital Structure in Asian Project Finance (March 1, 2008). Asia Pacific Journal of Management, Vol. 25, No. 1, pp. 25-50, 2008. Available at SSRN: https://ssrn.com/abstract=1308742

Paul M. Vaaler (Contact Author)

University of Minnesota, Twin Cities - Law School and Carlson School of Management ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-4951 (Phone)
612-626-1316 (Fax)

HOME PAGE: http://carlsonschool.umn.edu/faculty/paul-vaaler

Barclay E. James

Louisiana State University - E.J. Ourso College of Business ( email )

Baton Rouge, LA 70803-6308
United States
(225) 578-6148 (Phone)
(225) 578-6140 (Fax)

HOME PAGE: http://www.bus.lsu.edu/academics/management/facultywebpage.asp?autoid=669

Ruth V. Aguilera

Northeastern University - Department of International Business and Strategy ( email )

Boston, MA 02115
United States

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