Optimal capital structure and project financing

DOI10.1016/0022-0531(87)90086-XMaRDI QIDQ1091243zbMATH OpenOpenAlexFDO

Authors Salman Shah, Anjan V. Thakor

Publication date 1987

Published in Journal of Economic Theory (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/0022-0531(87)90086-x

zbMATH Keywords

financingincorporation modes for new projectsoptimal capital structure

Mathematics Subject Classification ID

Trade models (91B60) Corporate finance (dividends, real options, etc.) (91G50)

Review text

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 rationale 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.

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Cites work

• Financial Intermediation and Delegated Monitoring
• Incentive Compatibility and the Bargaining Problem
• Information Reliability and a Theory of Financial Intermediation
• Informational Equilibrium
• The Existence of Equilibrium in Discontinuous Economic Games, I: Theory
• The Existence of Equilibrium in Discontinuous Economic Games, II: Applications

Cited in

(10)

• Optimal project selection when borrowing and lending rates differ
• Debt recapitalization and value in waiting to finance a project
• The optimal financing of a conglomerate firm with hidden information and costly state verification
• Optimal capital structures for private firms
• Optimal capital structure with an equity-for-guarantee swap
• An optimal financing model: implications for existence of optimal capital structure
• Financing major investments: information about capital structure decisions
• High uncertainty financing
• Capital budgeting, investment project valuation and financing mix: methodological proposals.
• The role of lender behavior in international project finance

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