Law and Project Finance

Subramanian, K and Tung, F (2007) Law and Project Finance. Working Paper. SSRN. (Unpublished)

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Abstract

We investigate Project Finance as a private response to inefficiencies created by weak legal protection of outside investors. We offer a new illustration that law matters by demonstrating that for large investment projects, Project Finance provides a contractual and organizational substitute for investor protection laws. Project Finance accomplishes this by making cash flows verifiable through two mechanisms: (i) contractual arrangements made possible by structuring the project within a single, discrete entity legally separate from the sponsor; and (ii) private enforcement of these contracts through a network of project accounts that ensures lender control of project cash flows. Comparing bank loans for Project Finance with regular corporate loans for large investments, we show that Project Finance is more likely in countries with weaker laws against insider stealing and weaker creditor rights in bankruptcy. We identify the predicted effects using difference-in-difference and triple-difference tests that exploit exogenous country-level legal changes and inter-industry differences in free cash flow and tangibility of assets.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Subramanian, KUNSPECIFIED
Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Agency Cost, Bankruptcy Cost, Corporate Finance, Free Cashflow, Investor Protection, Leverage, Limited Recourse, Project Finance, Self-Dealing
Subjects: Finance
Depositing User: Ilayaraja M
Date Deposited: 09 Jun 2019 11:24
Last Modified: 09 Jun 2019 19:18
URI: http://eprints.exchange.isb.edu/id/eprint/1052
Publisher URL: http://dx.doi.org/10.2139/ssrn.972415
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