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Optimal Capital Structure and Project Financing

Author

Listed:
  • Salman Shah

    (University of Toronto)

  • Anjan V. Thakor

    (Washington University in St. Louis)

Abstract

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 rational 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.

Suggested Citation

  • Salman Shah & Anjan V. Thakor, 2004. "Optimal Capital Structure and Project Financing," Finance 0411041, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0411041
    Note: Type of Document - pdf; pages: 35
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    References listed on IDEAS

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