Risk Management with Leverage: Evidence from Project Finance
46 Pages Posted: 20 Mar 2011 Last revised: 8 Mar 2014
Date Written: March 19, 2011
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: Suggested Citation