Financial Management Theory and Practice.docx - Financial...

Financial Management: Theory and Practice
Countries across the globe use Project Finance vis-à-vis Corporate Finance in industries
like infrastructure where there are large cash flows. Project Finance involves significant costs
compare to Corporate Finance however the mitigation of Agency Cost (since certain assets like
tangible assets with high cash flows are susceptible to costly agency conflicts) and reduction in
the deadweight cost of bankruptcy are primary motivators for using Project Finance
(Subramanian, Tung, & Wang, 2007). The creation of a project company provides an opportunity
to create asset-specific, new governance systems to address the conflicts between ownership and
control. Another feature of Project Companies is that they utilize high leverage and joint
ownership to discourage costly agency conflicts.
The Advantages of the corporation structure are as follows:
 Limited liability. The shareholders of a corporation are only liable up to the amount of
their investments. The corporate entity shields them from any further liability.