Political Risk in Syndicated Lending: Theory and Empirical Evidence Regarding the Use of Project Finance

Christa Hainz, Stefanie Kleimeier
2004 Social Science Research Network  
We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower's home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we
more » ... ind overall support for our model and provide evidence that multilateral development banks act as "political umbrellas". JEL-Classification: D82, F34, G21, G32
doi:10.2139/ssrn.567112 fatcat:zsrozdzy6famhi3xjchbfid4cq