Project Financing Versus Corporate Financing Under Asymmetric Information
27 Pages Posted: 1 Mar 2007
Date Written: January 2007
Existing literature studies the effect of asymmetric information on many aspects of debt financing including debt maturity and seniority, collateral, liquidation rights, convertible debt, income bonds and sinking funds. Less is known about the effect of asymmetric information on firms' incentives to issue non-recourse debt (project financing). This paper is intended to shed new light on this issue. We analyze the choice between project financing and corporate financing when a firm's insiders have private information about the qualities of the firm's investment projects. Different informational structures and the resulting equilibria are considered. Empirical implications including new testable predictions are discussed.
Keywords: asymmetric information, non-recourse debt, project financing, optimal financing
JEL Classification: C72, D82, G29, G32, O220
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