Market Risk and the Prominence of Project Finance - A cross-country study of market volatility as a predictor of the choice of debt

Sammanfattning: The use of project finance has grown considerably in recent decades, both on a regional and industrial scale. This type of structured debt represents a specific investment vehicle associated with extensive risk mitigating features. In this study, we highlight the effects of market risk on the debt financing choice. The purpose of the study is to investigate the use of structured debt and determine how a firm can finance a project in an environment with higher market volatility and deteriorating credit market conditions. We conduct a cross-country study and identify significant effects of market volatility on the incidence of project finance using difference-in-difference tests. Our findings indicate that project finance loans are preferred in certain high-risk settings where credit conditions in the underlying market are negatively affected. Based on these findings, we argue that the project finance structure can help alleviate risks associated with financial instability in capital markets.