Optimal Capital Structure and Project Financing

Salman Shah and Anjan V. Thakor ()
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Salman Shah: University of Toronto

Finance from EconWPA

Abstract: We examine the financing and incorporation modes for new projects. There are two objectives. The first is to provide a theory of optimal capital structure that links risk, leverage, and value and is particularly applicable to large firms. Counter to conventional wisdom, we show riskier firms acquire more debt, pay higher interest rates, and have higher values in equilibrium. Second, we provide an economic rational for project financing which entails organizing a new project legally distinct from the firm's other assets. We explain why project financing involves higher leverage than conventional financing and why highly risky assets are project-financed.

JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2004-11-29
Note: Type of Document - pdf; pages: 35
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http://129.3.20.41/eps/fin/papers/0411/0411041.pdf (application/pdf)

Related works:
Journal Article: Optimal capital structure and project financing (1987)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411041

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