Risk Management with Leverage: Evidence from Project Finance

46 Pages Posted: 20 Mar 2011 Last revised: 8 Mar 2014

See all articles by Soku Byoun

Soku Byoun

Baylor University

Jaemin Kim

Fowler College of Business

Sean Sehyun Yoo

Belmont University - College of Business Administration

Date Written: March 19, 2011

Abstract

Project finance links financial structure to the project’s operational characteristics in order to optimize the allocation of project risk and cash flow. We find that project companies use more leverage when project risk is high, but use less leverage when risk-reducing features are present, when the project size is larger, and when there are more sponsors involved in the project. In contrast, country risk is negatively associated with leverage. Our findings suggest that leverage and organizational structure in the project company work as important hedging mechanisms in managing its risk exposures to the project-specific risk.

Keywords: Project Finance, Risk Management, Capital Structure

JEL Classification: G15, G32, F34

Suggested Citation

Byoun, Soku and Kim, Jaemin and Yoo, Sean Sehyun, Risk Management with Leverage: Evidence from Project Finance (March 19, 2011). Journal of Financial and Quantitative Analysis (JFQA), Vol. 48, 2013. Available at SSRN: https://ssrn.com/abstract=1790378 or http://dx.doi.org/10.2139/ssrn.1790378

Soku Byoun (Contact Author)

Baylor University ( email )

Department of Finance Insurance & Real Estate
P.O.Box 98004
Waco, TX 76712
254-710-7849 (Phone)

Jaemin Kim

Fowler College of Business ( email )

San Diego State University
5500 Campanile Drive
San Diego, CA 92182-8236
United States
619-594-2721 (Phone)

Sean Sehyun Yoo

Belmont University - College of Business Administration ( email )

United States

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