OPTIMAL INCORPORATION, STRUCTURE OF DEBT CONTRACTS, AND LIMITED-RECOURSE PROJECT FINANCING

We analyze the interrelationships among the corporate organization str ucture, the capital structure, and the ownership structure of a firm w ith multiple projects, when incumbent management derives control benef its. The choices made by firm management are: (1) Whether to set up pr ojects as a joint firm or as separate firms (spin-off), (2) the amount of debt financing to use, (3) the structure of the debt contract (e.g ., straight debt on the joint firm, limited-recourse project financing , or spin-off with straight debt), and (4) the fraction of equity to h old in each firm (ownership structure). Differences in managerial abil ity across projects, benefits of control, and the probability of loss of control through a takeover or through bankruptcy are driving factor s in this model. We relate the project characteristics to the optimali ty of spin-offs and limited-recourse project financing arrangements, a nd derive implications for the allocation of debt and the ownership st ructure across projects. (C) 1996 Academic Press, Inc.