Political uncertainty, hedging and wealth effects of project finance approvals

Despite growing importance of project loans in funding large-scale projects, there is a void in the literature examining market reactions to project financing. Using a unique hand-collected sample of project finance approval announcements by Australian-listed mining firms, we document a significant, positive 3-day market-adjusted return of 2.2% and a reduction of 2.35% in bid-ask spread. In multivariate analysis, we find higher abnormal returns for loans where there are no mandatory hedging requirements and for projects located in higher political risk jurisdictions. Results are robust to controlling for lender/borrower characteristics, including syndication, lender equity, lender specialization, borrower size and insider ownership