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Risk Management with Leverage: Evidence from Project Finance

Published online by Cambridge University Press:  07 March 2013

Soku Byoun ,
Jaemin Kim  and
Sean Sehyun Yoo
Soku Byoun
Affiliation:
byoun@baylor.edu, Hankamer School of Business, Baylor University, 1 Bear Pl #98004, Waco, TX 76798
Jaemin Kim
Affiliation:
jkim@mail.sdsu.edu, College of Business Administration, San Diego State University, 5500 Campanile Dr, San Diego, CA 92182
Sean Sehyun Yoo
Affiliation:
sehyun.yoo@belmont.edu, College of Business Administration, Belmont University, 1900 Belmont Blvd, Nashville, TN 37212.
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Abstract

We examine capital structures of 2,572 project-financed investments in 124 countries for the period 1997–2006. In contrast to the general prediction of the trade-off theory, we find that project companies use more leverage when project risk is high, but they use less leverage in the presence of risk-reducing features including offtake agreements. Project companies use less leverage and instead rely more on offtake agreements when the control benefits of cash flow from the project are high, suggesting that leverage and contract structures in the project company are important hedging mechanisms.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 2 , April 2013 , pp. 549 - 577
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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