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Project financing vs. corporate integration : decision-making under operational and financial risks

  • The article addresses the choice between setting up a project entity and integrating the project into a corporation from the perspective of a dynamic corporate finance model in the absence of operational syn- ergies. The analysis builds upon a classic continuous-time framework with tax benefits of debt, costs of default and, more innovatively, a benefit or cost of abandonment derived for two projects with stochastic, correlated revenues. By implementing the model with a simulation-based approach, I show that foremost high correlations, high volatilities and high portions of fixed costs as well as heterogenous volatilities, bankruptcy costs and operational cost structures stimulate independent project structures. Further, a more difficult or costly access to external funds raises the benefits of merging activities in a combined firm.

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Document Type:Working Paper
Author:Maximilian SchreiterORCiD
Chairs and Professorships:Chair of Mergers & Acquisitions
Year of Completion:2020
Tag:Abandonment options; Default risk; Financial synergies; Optimal capital structure; Project financing; Real options
Working Paper
Content Focus:Academic Audience
Licence (German):License LogoUrheberrechtlich gesch├╝tzt