Project Finance as a Risk-Management Tool in International Syndicated Lending
Governance and the Efficiency of Economic Systems (GESY), SFB/TR 15, Discussion Paper No 183
48 Pages Posted: 3 Aug 2004
Date Written: December 2006
Abstract
We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower's home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we find overall support for our model and provide evidence that multilateral development banks act as "political umbrellas".
Keywords: Project finance, syndicated loans, political risk, double moral hazard
JEL Classification: D82, F34, G21, G32
Suggested Citation: Suggested Citation
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