Skip to main content
SpringerLink
Log in

Risk and capital structure in Asian project finance

  • Published:
Asia Pacific Journal of Management Aims and scope Submit manuscript

Abstract

We develop and test hypotheses derived from a multi-level theoretical framework for understanding factors shaping the credit risk and capital structure of a quintessentially Asian form of investment known as project finance. It differs from other corporate financing approaches. A project company is separate and bankruptcy remote from the investing firm sponsors that create it. The project company relies extensively on debt capital provided by creditors to fund project operations. Creditors provide more (less) debt as a percentage of overall project capital when there is less (more) risk of project failure and non-repayment. We define a target risk framework identifying country-, industry-, syndicate-, firm-, and project-related factors shaping Asian project finance company credit risk and thus, project debt. In a sample of 238 project finance companies announced in 13 Asian countries from 1995–2004, we observe substantial effects on project capital structure with respect to country-level factors linked to institutional and macroeconomic theories, syndicate structure factors linked to agency theory, and lead sponsor experience and project size factors linked to learning and transaction cost theories. We argue that these and other determinants of project finance company credit risk and capital structure in Asia since the mid-1990s anticipate similar relationships now emerging elsewhere around the globe.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2
Figure 3
Figure 4

Similar content being viewed by others

Notes

  1. IB researchers familiar with a classic teaching case of FDI and political risk in a decolonizing Papua New Guinea in the early 1970s, Bougainville Copper Ltd. (Hammond & Allan, 1974), may be surprised to learn that Bougainville Copper was itself a project finance company with the Australian MNC parent, Rio Tinto, as its lead sponsor.

  2. The potential of our Asian empirical setting to inform research in other parts of the world underscores Peng’s (2005) point of how China strategy research has made theoretical contributions to global strategy research.

  3. See, e.g., Brealy and Myers (2006) for an overview of this research.

  4. This agency-based prediction competes with an alternative view also proposed by Esty and Megginson (2003) in the related context of bank lending syndicate size and risk. They conjecture that banks create larger lending syndicates in order to deter strategic default by borrowers, because the larger the syndicate the more expensive it is for borrowers to restructure. We note this alternative prediction but think it less apt in the case of equity-holding syndicates. Here, default concerns do not implicate borrowers, but perhaps, default by third-party service providers. Individually, such default is not likely to result in major project re-structuring. Indeed, it is a common project finance practice to engage alternative third-party service providers on a stand-by basis to fill in the event of non-performance by an active service provider (Finnerty, 1996).

  5. Where project equity is split equally between a foreign and domestic sponsor, we code the observation as 0 indicative of domestic lead sponsorship.

  6. Projects occasionally begin with approximately 100% debt-capitalization. In these cases, the nominal equity sponsor or sponsors are also temporarily substantial project creditors.

  7. Those 13 countries are: Australia, Azerbaijan, Bengladesh, China (PRC), Hong Kong, India, Indonesia, Japan, New Zealand, Pakistan, Philippines, Singapore, and South Korea.

References

  • Aguilera, R. V., & Jackson, G. 2003. The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28: 447–465.

    Article  Google Scholar 

  • Balakrishnan, S., & Fox, I. 1993. Asset specificity, firm heterogeneity and capital structure. Strategic Management Journal, 14: 3–16.

    Article  Google Scholar 

  • Booth, L., Aivazian, A., Demirguc-Kunt, A., & Maksimovic, V. 2001. Capital structure in developing countries. Journal of Finance, 56: 87–130.

    Article  Google Scholar 

  • Brealy, R., & Myers, S. 2006. Principles of corporate finance (8th ed). New York: McGraw-Hill.

    Google Scholar 

  • Buljevich, E., & Park, Y. 1999. Project financing and the international capital markets. Boston, MA: Kluwer.

    Google Scholar 

  • Cantor, R., & Packer, F. 1996. Determinants and impacts of sovereign credit ratings. Federal Reserve Bank of New York Economic Policy Review, October Volume: 37–53.

  • Coffee, J. 1999. The future as history: The prospects for global convergence in corporate governance and its implications. Northwestern University Law Review, 93: 641–708.

    Google Scholar 

  • Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 2003. Courts. Quarterly Journal of Economics, 118: 453–517.

    Article  Google Scholar 

  • Djankov, S., McLiesh, S., & Shleifer, A. 2007. Private credit in 129 countries. Journal of Financial Economics, 84:299–329.

    Google Scholar 

  • Doh, J., Teegan, H., & Mudambi, R. 2004. Balancing private and state ownership in emerging markets telecommunications infrastructure: Country, industry, and firm influences. Journal of International Business Studies, 35: 233–250.

    Article  Google Scholar 

  • Esty, B. 2002. Returns on project-financed investments: Evolution and managerial implications. Journal of Applied Corporate Finance, 15: 71–86.

    Article  Google Scholar 

  • Esty, B. 2003. The economic foundations for using project finance. Working paper, Harvard Business School. Available electronically on December 15, 2006 at: http://www.people.hbs.edu/besty/BCE%20PF%20Motivations%202-14-03.pdf.

  • Esty, B. 2004. Why study large projects? An introduction to research on project finance. European Financial Management, 10: 213–224.

    Article  Google Scholar 

  • Esty, B., & Megginson, W. 2003. Creditor rights, enforcement, and debt ownership structure: Evidence from the global syndicated loan market. Journal of Financial and Quantitative Analysis, 37: 38–59.

    Google Scholar 

  • Finnerty, J. 1996. Project financing: Asset-based financial engineering. New York, NY: Wiley.

    Google Scholar 

  • Ghemewat, P. 1991. Commitment: The dynamic of strategy. New York, NY: Free.

    Google Scholar 

  • Hadfield, G. 2005. Contract law is not enough: The many legal institutions that support contractual commitments. In Claude Menard & Mary Shirley (Eds.), Handbook of New Institutional Economics. Amsterdam, The Netherlands: Springer.

    Google Scholar 

  • Hammond, J., & Allan, G. 1974. Bougainville copper ltd. (B-E). Harvard Business School Publishing Case #174104, 175071–175072, 175304. Boston, MA: Harvard Business School Publishing.

  • Harris, M., & Raviv, A. 1991. The theory of capital structure. Journal of Finance, 46: 297–355.

    Article  Google Scholar 

  • Henisz, W., & Delios, A. 2001. Uncertainty, imitation, and plant location: Japanese multinational corporations, 1990–1996. Administrative Science Quarterly, 46: 443–475.

    Article  Google Scholar 

  • Jensen, M., & Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3: 305–360.

    Article  Google Scholar 

  • Johanson, J., & Vahlne, J. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8: 23–52.

    Article  Google Scholar 

  • John, T., & John, K. 1991. Optimality of project financing: Theory and empirical implications in finance and accounting. Review of Quantitative Finance and Accounting, 1: 51–74.

    Article  Google Scholar 

  • Lang, L. 1998. Project finance in Asia (Advances in Finance, Investment, and Banking, V. 6). Amsterdam, The Netherlands: Elsevier Science Ltd. (North-Holland).

    Google Scholar 

  • LaPorta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. 1998. Law and finance. Journal of Political Economy, 106: 1113–1155.

    Article  Google Scholar 

  • Lessard, D. 1996. Incorporating country risk in the valuation of offshore projects. Journal of Applied Corporate Finance, 9: 52–63.

    Article  Google Scholar 

  • Libecap, G. 1989. Contracting for property rights. Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • Lieberman, M. 1989. The learning curve, technology barriers to entry, and competitive survival in the chemical processing industries. Strategic Management Journal, 10: 431–447.

    Article  Google Scholar 

  • Luo, Y., & Peng, M. 1999. Learning to compete in a transition economy: Experience, environment, and performance. Journal of International Business Studies, 30: 269–296.

    Article  Google Scholar 

  • Makino, S., & Beamish, P. 1998. Local ownership restrictions, entry mode choice, and FDI performance: Japanese overseas subsidiaries in Asia. Asia Pacific Journal of Management, 15: 119–136.

    Article  Google Scholar 

  • Meyer, K. 2006. Asian management research needs more self-confidence. Asia Pacific Journal of Management, 23: 119–137.

    Article  Google Scholar 

  • Meyer, K., & Peng, M. 2005. Probing theoretically into Central and Eastern Europe: Transactions, resources, and institutions. Journal of International Business Studies, 36: 600–621.

    Article  Google Scholar 

  • Mitchell, W. 1991. Dual clocks: Entry order influences on incumbent and newcomer market share and survival when specialized assets retain their value. Strategic Management Journal, 12: 85–100.

    Article  Google Scholar 

  • Modigliani, F., & Miller, M. 1958. The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48: 261–297.

    Google Scholar 

  • Myers, S. 1984. The capital structure puzzle. Journal of Finance, 39: 575–592.

    Article  Google Scholar 

  • North, D. 1990. Institutions, institutional change and economic performance. Cambridge, U.K.: Cambridge University Press.

    Google Scholar 

  • Peng, M. 2003. Institutional transactions and strategic choices. Academy of Management Review, 28: 275–296.

    Article  Google Scholar 

  • Peng, M. 2005. From China strategy to global strategy. Asia Pacific Journal of Management, 22: 123–141.

    Article  Google Scholar 

  • Peng, M., & Delios, A. 2006. What determines the scope of the firm over time and around the world? An Asia Pacific perspective. Asia Pacific Journal of Management, 23: 385–405.

    Article  Google Scholar 

  • Pistor, K., Raiser, M., & Gelfer, S. 2000. Law and finance in transition economies. Economics of Transition, 8: 325–368.

    Article  Google Scholar 

  • Rajan, K. S., & Pangarkar, N. 2000. Mode of entry choice: An empirical study of Singaporean multinationals. Asia Pacific Journal of Management, 17: 49–66.

    Article  Google Scholar 

  • Rajan, R., & Zingales, L. 1995. What do we know about capital structure? Some evidence from international data. Journal of Finance, 50: 1421–1460.

    Article  Google Scholar 

  • Reynolds, T., & Flores, A. 1989. Foreign law: Current sources of codes and basic legislation in jurisdictions of the world (1st ed.). Littleton, CO: F.B. Rothman.

    Google Scholar 

  • Reynolds, T., & Flores, A. 2003. Foreign law: Current sources of codes and basic legislation in jurisdictions of the world (2nd ed.). Littleton, CO: F.B. Rothman.

    Google Scholar 

  • Ribstein, L. 2005. Cross-listing and regulatory competition. Review of Law and Economics, 1: 1–50.

    Google Scholar 

  • Shaver, M., Mitchell, W., & Yeung, B. 1997. The effect of own-firm and other-firm experience on foreign direct investment survival in the United States, 1987–1992. Strategic Management Journal, 18: 811–824.

    Article  Google Scholar 

  • Stata Corp. 2005. Stata statistical software: Release 9.2. College Station, TX: Stata Corporation.

    Google Scholar 

  • Thomson-SDC. 2006. Thomson-securities data corporation project finance investment database. New York, NY: Thomson Financial.

    Google Scholar 

  • Vaaler, P. 2007. How do MNCs vote in developing country elections? Academy of Management Journal, 50. (forthcoming)

  • Vaaler, P., & McNamara, G. 2004. Crisis and competition in expert organizational decision making: Credit rating agencies and their response to turbulence in emerging economies. Organization Science, 15: 687–703.

    Article  Google Scholar 

  • Vaaler, P., Schrage, B., & Block, S. 2006. Elections, opportunism, partisanship and sovereign ratings in developing countries. Review of Development Economics, 10: 154–170.

    Article  Google Scholar 

  • Wang, H., Huang, H., & Bansal, P. 2005. What determined success during the Asian economic crisis? The importance of experiential knowledge and group affiliation. Asia Pacific Journal of Management, 22: 89–106.

    Article  Google Scholar 

  • WDI. 2006. World Development Indicators, 2005. Washington, DC: World Bank.

    Google Scholar 

  • Williamson, O. 1988. Corporate finance and corporate governance. Journal of Finance, 43: 567–591.

    Article  Google Scholar 

  • Wright, M., Filatotchev, I., Hoskisson, R., & Peng, M. 2005. Strategy research in emerging economies: Challenging the conventional wisdom. Journal of Management Studies, 42: 1–33.

    Article  Google Scholar 

  • Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38: 341–363.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, 350 Wohlers Hall 1206 South Sixth Street, Champaign, IL, 61820, USA

    Paul M. Vaaler, Barclay E. James & Ruth V. Aguilera

Authors
  1. Paul M. Vaaler
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Barclay E. James
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ruth V. Aguilera
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Paul M. Vaaler.

Additional information

We benefited from comments, criticisms and suggestions for revision received from Mike Peng (APJM Editor-in-Chief), Arie Lewin participants at the Fourth Annual AIB/JIBS Conference on Emerging Research Frontiers in International Business in San Diego, November 2006, and an anonymous reviewer. We thank Randy Westgren and the UIUC Center for International Business and Education and Research (CIBER) for generous financial support. All remaining errors are ours.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Vaaler, P.M., James, B.E. & Aguilera, R.V. Risk and capital structure in Asian project finance. Asia Pacific J Manage 25, 25–50 (2008). https://doi.org/10.1007/s10490-007-9045-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10490-007-9045-4

Keywords

Search

Navigation