, Volume 25, Issue 1, pp 25-50
Date: 18 May 2007

Risk and capital structure in Asian project finance

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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.

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.