An em.pirical ana.lysis of debt capacity of project companies in emerging economies

Abstract

Within institutional economics perspective of project finance, this paper empirically examines the potential influence of factors on debt capacity in project companies when financed through bank-dominated financial systems with comparatively weak legal, regulatory and political institutions. The principle focus of the research is on governance impact on debt capacity of the project company rather than traditional determinants of capital structure choice. • Following previous linear functions on loan syndication, an econometric model on debt capacity is constructed using institutional environment and transaction-specific variables. The model is run for a sample of infrastructure project companies in Asia within the domain of structuring of credit transactions. • The econometric results confirm that stable institutional environments and appropriate mechanisms to manage risk of agency problems increase debt capacity in project companies financed through bank-type intermediaries in emerging economies. • These findings reveal that improvements in institutional capacity and establishment of alternative arrangements to mange credit risks could work to promote long-term investment schemes such as project finance for infrastructure development.