Financial advisor reputation and the cost of debt: Theory

and evidence from project finance loans.∗

Djerry C. Tandja M.†, Gabriel J. Power‡ and Issouf Soumaré§.

Université Laval, Department of Finance, Insurance and Real Estate

Faculté des sciences de l’administration, Pavillon Palasis-Prince,
2325 rue de la Terrasse, Québec , QC, Canada G1V 0A6

Job Market Paper

This version: October 3, 2017

Abstract
An important puzzle in credit markets is why some firms use the services of financial advisors
(FA) rather than undertake those tasks themselves. This paper examines, using theory and empiri-
cal evidence, whether the presence and the reputation of FA can act as a credible signal of project
quality. Our theoretical model shows that, because of the structure of success fees, project lenders
may worry that FA will try to sell them excessively risky projects, leading to higher costs of debt.
Using Projectware data on project finance (PF) loans granted to public-private partnership projects
arranged between 2001 and 2015, we test empirically and find strong support for our theoretical
prediction. Indeed, our empirical results show that the presence and the reputation of FA are asso-
ciated with higher costs of debt. Moreover, the evidence shows that FA presence and reputation are
linked to higher project debt ratios. Overall, our findings suggest that the structure of success fees
offers strong incentives to FA to focus on providing high debt levels rather on reducing asymmetric
information between sponsors and lenders. Therefore, the presence and reputation of FA do not
seem to be credible signaling devices for quality in the market for project finance loans.

Keywords: Financial intermediation, Asymmetric information, Market signaling, Cost of debt, Project
finance, Public-private partnership

JEL codes: F34, G21, D82.

∗
We thank Stéphane Chrétien, Philippe Grégoire, Josée Bastien and Hubert Tchakoute Tchuigoua for helpful comments.
Tandja acknowledges support from CRIB and CIRPEE.
†
PhD student in Finance. Principal corresponding author. Contact: charli.tandja-mbianda.1@ulaval.ca
‡
Associate Professor of Finance. Contact: gabriel.power@fsa.ulaval.ca
§
Professor of Finance. Contact: Issouf.Soumare@fsa.ulaval.ca

Electronic copy available at: https://ssrn.com/abstract=3046219

1 Introduction

An important puzzle in credit markets is why some firms use the services of financial advisors (FA)

rather than undertake those tasks themselves. This is perhaps because FA can provide value by lowering

lenders’ informational disadvantage. Indeed, Akerlof (1970), Spence (1973) and Rothschild and Stiglitz

(1976) have shown that one side of the capital market has better information than does the other. For

instance, entrepreneurs know more about their projects than do lenders. In such markets characterized

by asymmetric information, Spence (1973) has shown that it would be in the interest of good firms

to take observable and costly actions to credibly signal their quality to the market to improve their

outcome. An entrepreneur may thus incur the additional costs of FA services (independent agents),

so as to signal to potential lenders the high project quality to improve their credit terms. If the less

informed side of the credit market cannot distinguish between good and bad firms, this market might

conceivably collapse.

The recent financial literature has examined the signal communicated by the presence of FA in

Mergers and Acquisitions (M&A) deals (e.g. Gobulov et al., 2012) and in equity initial public offerings

(IPOs) (e.g Fang, 2005). Both papers find that the presence of prestigious FA is a credible signaling

device. However, little is known about the signal communicated by the presence and the reputation1

(their market shares) of FA in credit markets. We fill this gap with this paper by first developing a

theoretical model that examines whether the presence and reputation of FA can act as a credible signal

of project quality. Then, using rich data on project finance (PF) loans, we empirically test our theoretical

model.

There is a significant advantage to using data on PF loans to examine the signal communicated

by the presence and reputation of FA, compared with using data on corporate loans. Indeed, FA are

hired for one specific project in the context of PF, compared with multiple projects in corporate finance.

Likewise, bank loans in PF are linked to a single project, while in a corporate setting there are several

sources of and uses for debt financing. Thus, identification of the signal of interest is clearer using our
1
In this paper, we are talking about the reputation at the firm level, and not the reputation of the personnel who provide the
service. See the empirical audit literature for more information on the effect of the reputation at the personnel level (Aobdia
et al., 2015; Knechel et al., 2015). Unfortunately, the name of the personnel and their experience or the number of hours
needed to investigate the project are not disclosed in our database. Therefore, we limit our analysis to the firm level.

Electronic copy available at: https://ssrn.com/abstract=3046219

empirical strategy.

The existing literature in PF does not satisfactorily answer this question. Early research focused on

the theoretical reasons behind the use of PF loans rather than corporate loans (Shah & Thakor, 1987;

John & John, 1991; Chemmanur & John, 1996). Subsequent research has looked at the differences

between PF loans and other syndicated loans (Kleimeier & Megginson, 2000; Esty & Megginson, 2003).

More recently, the literature has examined how loan pricing is affected by country-specific and insti-

tutional quality indicators (Byoun & Xu, 2014; Esty, 2004b; Girardone & Snaith, 2011; Vaaler et al.,

2008; Subramanian & Tung, 2016), or by nonfinancial contracts (Byoun et al., 2013; Corielli et al.,

2010; Dailami & Hauswald, 2007). Moreover, some research has provided reasons for the participation

of development banks in PF deals (Hainz & Kleimeier, 2012). To the best of our knowledge, Gatti et

al. (2013) are the first to address the signaling problem using PF loans. They show that certification by

prestigious mandated lead arrangers (MLA) reduces loan spreads, compared to that by less prestigious

MLA. Unlike Gatti et al. (2013) who study the signaling problem between MLA and other participants

in the credit syndicate, this paper studies the signaling problem between the project’s sponsors and all

lenders.

To describe the issue of advisor credibility in the PF market, we borrow the models of Inderst and

Ottaviani (2012) and Debbich (2015), and adapt them to the context of the PF market 2 . These authors

develop theoretical models to analyze the credibility of the information transmitted by an informed fi-

nancial advisor to a customer of financial services. They show that only customers with a sophisticated

knowledge of finance will receive relevant information from their advisor. We modify their framework

by assuming that a project’s sponsor hires a financial advisor who will approach a lender to obtain debt

financing. We further assume that the financial advisor learns about the project’s risk, and should com-

municate this information to potential lenders. In return for its services, the financial advisor receives

from the project’s sponsor success fees, which are a percentage of the debt value.3 We show that, be-

cause of the structure of success fees, FA will tend to transfer irrelevant information to lenders that have
2
Note here that we do not claim to be developing new models. We simply adapt their models to the context of project
finance markets, to provide a framework to describe our testable hypotheses.
3
That is the current practice, see Gatti (2013, Chap. 6, p. 183) for more details. While FA receive a retainer fee on lump-
sum basis, which is paid even when the project is not funded, they receive also success fee on percentage basis of the debt
value, which is paid only when the project is funded.

3
less experience in the PF market. Thus, the structure of success fees offers FA an incentive to focus more

on obtaining the debt than on reducing the level of asymmetric information.

This theoretical result helps us to develop two testable hypotheses: i) the Fear of Risk Hypothesis

(FR), according to which lenders may worry that FA are trying to sell them excessively risky deals; and

ii) the Fear of Advisor Reputation Hypothesis (FAR), whereby lenders may be more concerned when FA

enjoy a greater reputation. Because the PF market is a relatively new market, lenders who are active

in this market have less experience. If our Fear of Risk Hypothesis is confirmed, we expect a higher cost

of debt for projects involving FA. If our Fear of Advisor Reputation is verified, we expect that lenders

increase the costs of debt when FA enjoy a higher reputation.

To empirically investigate these hypotheses, we use detailed data on 482 PF loans granted to fund

public-private partnerships (PPPs) projects from 2001 to 2015. We find strong support for our hypothe-

ses. Our empirical results show that the presence and the reputation of FA are associated with higher

loan spreads. Our finding is robust even when we control for the type of firms, i.e. only professional

services firms versus mixed services firms. We also find that the presence and the reputation of FA are

associated with higher debt ratios. This result suggests that sponsors hire FA to take advantage of their

banking connection to increase leverage. Unlike Gobulov et al. (2012) who show that the ranking of

FA signals the quality of its services, we show that the adviser’s position in League Tables for the global

PF loan market signals the degree of their banking connections. In sum, we find that the structure of

success fees induce FA to focus more on providing a high debt level than on reducing asymmetric infor-

mation. As a result, the presence and the reputation of FA do not seem to be credible signaling devices

for quality in the PF loan market.

This paper contributes to the existing literature on syndicated loans, financial intermediation, and

project finance. Our study is the first to our knowledge to investigate the influence of FA on PF loan

spreads. Moreover, this paper is the first to study the presence and the reputation of FA as a signaling

device in this setting.

The rest of the paper is organized as follows. Section 2 presents the related literature on Mergers &

Acquisitions and on project finance. Section 3 presents the theoretical model and the testable hypothe-

ses. In sections 4 and 5, we present descriptive statistics of the data and the empirical results of the

4
hypotheses, respectively. We also examine the effect of the presence and the reputation of FA on the

debt ratio. The section 6 concludes this paper.

2 Related literature

2.1 Financial advisors in corporate finance

The role of FA as producers of credible information has been mainly studied in the literature on Mergers

and Acquisitions (M&As), beginning with the seminal paper of Chemmanur and Fulghieri (1994). Two

main hypotheses have been tested: the superior deal hypothesis and the deal completion hypothesis.

The superior deal hypothesis considers that prestigious financial advisors are able to identify better

merger partners, which leads to greater wealth for their clients. On the other hand, the deal completion

hypothesis considers that the fee structure provides strong deal completion incentives, inducing FA to

focus more on completing the deal rapidly, such that the client’s gains are of secondary importance.

Prior to the studies of Fang (2005) and Gobulov et al. (2012), the empirical literature had failed

to support the superior deal hypothesis. Indeed, Michel et al. (1991) show that deals advised by less

prestigious FA provide higher bidder cumulative abnormal returns (CARs) than those advised by highly

prestigious FA. Servaes and Zenner (1996) compare acquisitions completed with and without financial

advisors. They find that transactions completed with (top-tier) financial advisors result in lower acquirer

returns. Rau (2000) find that top-tier financial advisors in M&As don’t provide higher abnormal returns.

This negative relationship between the post-acquisition performance of the acquirers and the reputation

of the financial advisors is also found by Ismail (2010), Hunter and Jagtiani (2003) and Ertugrul and

Krishnan (2014). However, in tender offers, Rau (2000) finds that the deal completion rate is lower

when a top-tier advisor is used, which supports the deal completion hypothesis. These studies suggest

that FA are more strongly motivated by the fee income structure than by the quality of their services.

These results together imply that advisor League Tables, which are based on their market share, are

unlikely to be signals of the quality of their services.

In contrast with previous studies in M&As, Gobulov et al. (2012) separate their sample of target

firms into public (listing firms) and private (unlisted firms). They find a positive relationship between

5
the reputation of FA and the post-acquisition performance of the acquirers (CARs) of listing firms, which

supports the superior deal hypothesis. This result suggests that the visibility of target firms provides

greater incentives to FA, as bad advice should lead to a greater loss of reputation. Moreover, Gobulov et

al. (2012) find that top-tier advisors take less time to complete deals, which supports the deal completion

hypothesis. Furthermore, in equity initial public offerings, Fang (2005) finds a positive relationship

between financial advisor (underwriter) reputation and security pricing. This result suggests that the

reputation of FA signals issue quality. The main conclusion from these two studies is that the reputation

of FA is a credible signaling device only when the deal is public (i.e., listed on stock exchanges).

2.2 Previous empirical studies on project finance deals

The earliest empirical studies on PF deals analyze differences between PF loans and other syndicated

loans. Based on the findings of Kleimeier and Megginson (2000), PF loans have a longer average ma-

turity, more third-party guarantees, more participating banks, fewer loan covenants, and they are more

likely to be extended to borrowers in riskier countries. These loan-specific factors make PF loans cheaper

than other syndicated loans (i.e., a lower credit spreads over LIBOR). Esty and Megginson (2003) find

that the syndicate structure of PF deals depends on creditor rights. Indeed, they find that creditor rights

are positively related to debt concentration. Their main conclusion is that lenders create larger loan

syndicates to protect themselves against project strategic default, especially when they cannot rely on

legal enforcement mechanisms. Thus, the loan syndicate structure of PF deals is used to manage risk.

The second stream of the literature analyzes how loan pricing is affected by country-specific and

institutional quality indicators. Esty (2004b) finds that loan spreads are positively related to the frac-

tion of funds provided by foreign banks, which in turn is positively related to creditor rights, to legal

enforcement, to less-developed financial systems, and to less government ownership of banking assets.

Overall, Esty (2004b) shows that the quality of the legal and financial systems is decisive in attract-

ing foreign banks, and that sponsors must pay more to access foreign capital. Girardone and Snaith

(2011) find that loan spreads are negatively related to institutional quality indicators (effectiveness,

quality, and strength of the country’s legal and institutional systems). However, they also find that loan

spreads are positively related to levels of government stability and democratic accountability, which is

6
due to the transfer of these risks from the project to the host country. Indeed, Subramanian and Tung

(2016) show that PF provides a contractual and organizational substitute for investor protection laws,

so that it is more likely to be found in countries with weaker laws against insider theft and weaker cred-

itor rights regarding bankruptcy. Moreover, Hainz and Kleimeier (2012) show that the political risk in

such projects can be mitigated through the participation of multilateral development banks, which have

strong bargaining power. In sum, the terms of the loan contract depend on the legal (creditor rights)

and institutional (political risk) environment.

The third stream of the literature investigates how loan pricing is affected by nonfinancial contracts.

Corielli et al. (2010) show that the presence of nonfinancial contracts, which reduces project cash flow

volatility by shifting risks, decreases loan spreads and increases the debt-to-equity ratio.

The fourth and last stream of the literature examines the problem of informational asymmetries

in PF deals. To the best of our knowledge, Gatti et al. (2013) is the only paper that addresses the

signaling problem in PF deals. They show that project certification by prestigious MLA reduces loan

spreads, compared to when it is done by less prestigious MLA. In sum, their reputation helps to keep

MLA “honest.” Our paper is more closely related to this area of the literature. Unlike Gatti et al. (2013),

who examine the signaling problem between MLA and other participants in the syndicate, our paper

examines the signaling problem between the sponsors and the MLA. In spite of the growing empirical

research on PF loans, the signaling problem between sponsors and the MLA has not received attention.

We aim to fill this gap with this paper.

3 Institutional Background, Theoretical Model and Testable Hypotheses

3.1 Institutional Background

Following Shah and Thakor (1987), project finance can be defined as “the raising of funds on a limited-

recourse or nonrecourse basis to finance a single indivisible large-scale capital investment project, whose

cash flows are the main or sole source to meet financial obligations and provide returns to investors”.

This innovative financing method has been intensively used to finance large-scale projects including

energy, oil & gas, telecom, mining, and public infrastructure (e.g. hospitals, schools, government build-

7
ings, prisons). In such projects, typically over 70% of funding is provided by lenders. The project’s

sponsors often hire FA whose main objective is to produce a document (information memorandum)

with which they will contact and begin to negotiate the credit agreement with the arrangers (see Gatti,

2013, p. 170). The role played by FA as credible information producers is therefore crucial to the ex-

istence of the PF market. It may be in the interest of sponsors to hire advisors to benefit from their

expertise and their resources (Edwards et al., 2012, pp. 27-36). Indeed, FA have more detailed and

up-to-date market knowledge than do the sponsors. Due to its repeated involvement in PF deals, FA

are better informed about what risks private sector investors would be willing to bear, thus allowing for

a more efficient risk allocation. By hiring FA with large and flexible teams, sponsors may focus their

resources on the main project activities. Moreover, sponsors may hire FA to increase investor confidence

that the project is worth financing, i.e. improve its “bankability”. Indeed, valuation by an independent

agent brings additional credibility to the project, which should result in a more favorable credit agree-

ment. Therefore, in light of the information asymmetry between project sponsors and lender, clearly

the tasks undertaken by FA can be crucial.

In the feasibility stage, FA help sponsors by identifying and valuing project opportunities. In the

financing stage, FA give advice regarding the optimal financial structure for the project, sources of debt,

implications of project contracts, and the selection of commercial bank lenders or placement of bonds.

Moreover, they help with the preparation of the financial plan, and assist sponsors in the negotiation

of financial documentation (Yescombe, 2014, p. 51). At the same stage, they write information memo-

randa to present the project to financial markets, and they contact potential arrangers to negotiate the

terms of the loans. When a financial institution accepts the mandate of lead arranger, this means that it

accepts to structure and manage the financing contract. Therefore, the mandated lead arranger guar-

antees the project sponsors the availability of funds, even if subsequently he is not able to find lenders

willing to participate in the syndication process (See Gatti, 2013, p. 173). Given information asymme-

try and the high debt level in such agreements, FA contact first potential arrangers with whom they have

previous relationships. In this situation, FA have private information about the quality of the project

and the preferences of the potential arranger that they contact. By playing the role of independent

intermediary, however, the FA put their reputation at risk.

8
 In return for their services, FA receive in practice two types of fees: retainer fees and success fees.

As explained by Gatti (2013), the retainer fee covers the costs occurred by FA during the study and

preparation phase of the deal. The success fee is paid by the sponsors, once FA find financial institutions

who accept to act as MLA. Retainer fees are paid on a lump-sum basis whether or not the project is

funded. However, the success fees are paid as a percentage of the debt value only if the project is funded.

The PF literature gives two possible explanations as to why sponsors pay success fees on a percentage

basis of the debt value, instead of the project value as is the case in corporate finance deals (See Gatti,

2013, p. 183). Note first that the current structure of success fees in PF deals aims to provide incentives

to FA to structure deals with the highest possible debt ratio. Moreover, the project value is composed of

the debt provided by project lenders and of the equity provided by the sponsors of the project. Thus,

linking the payment to FA on a percentage basis of the project value would induce sponsors to pay fees

on funds which they provided themselves. In this paper, we argue that the current structure of success

fees may increase the level of the debt ratio, but it damages the credibility of FA in the PF market. As a

result, the fee structure may induce FA to transfer only irrelevant information in order to receive success

fees. To illustrate the intuition behind this result, we present a stylized theoretical model below.

3.2 Theoretical Model

To illustrate the issue of advisor credibility in the PF market, we borrow the models of Inderst and

Ottaviani (2012) and Debbich (2015) and adapt them to the context of the PF market. Our specific

framework differs, however, from the one described by these authors. Indeed, in their models FA are

paid by customers of financial services who hope to receive good advice, so the problem is one of moral

hazard (Grossman & Hart, 1986; Aghion & Bolton, 1992). In our model, however, FA are paid by

sponsors based on the current fee structure. They should communicate information about the project

to potential lenders, such as its true level of risk, in order to secure financing, as a result of which it is

a signaling problem (Spence, 1973; Leland & Pyle, 1977; Harris & Raviv, 1985; Milde & Riley, 1988).

9
3.2.1 The framework

Consider a financial advisor approaching a lender L (an investment bank or a commercial bank) with

one project. The lender has two options θ = {A, B}, where A corresponds to the choice to invest in the

risky project and B to the choice of not investing at all. If the lender decides to invest in the project,

it provides a level of debt DA = D, which is decided by the sponsors who hired the financial advisor. 4

If the lender decides not to invest at all, the amount of debt provided is clearly DB = 0. Thus, in our

baseline setting, there are three strategic players: i) The sponsors who are a monopolistic provider of

the project, (ii) the financial advisor who receives a payment from the sponsors only upon successful

funding of the project, and (iii) a lender who has the choice to invest or not to invest in the project.

Assume that the lender cannot observe the true risk of the project. However, it can learn about the

project risk through what is revealed by the financial advisor. The financial advisor obtains commission

fees only when the funding is successful, hence only when the lender provides D. Thus, the advisor may

have an incentive not to provide certain relevant information to the lender (e.g., the project’s true level

of risk). But the financial advisor, who cares about reputation, will provide biased advice only when the

reputational cost of doing so does not exceed the benefit. The outcome for the lender depends on the

match between the lender’s preferences (related to project risk) and the characteristics of the options

available (e.g., the true project risk). Suppose that there are two lender types, namely θ̂ = {Â, B̂}, where

 corresponds to lenders who like risk and B̂ to lenders who do not. As in Inderst and Ottaviani (2012),

we assume that utility vθ ,θ̂ realized by the lender is higher when the lender’s preferences match the

characteristics of the options: vA, > vB, and vB,B̂ > vA,B̂ . To simplify, we also impose symmetry by

supposing that vA, = vB,B̂ = vh and vA,B̂ = vB, = vl . That is, lenders derive higher utility only when

their preferences match the characteristics of the two options available to them. Assume that the lender

has prior beliefs regarding the level of the project risk, and that these beliefs depend on his experience

in the PF market, or on his experience in the project sector. The lender chooses between A and B based

on his prior beliefs. Following Debbich (2015), we assume that the conditional probability that the

message received by the lender is true given the best match lender’s preference P(γ = θA|Â) to be an
4
In what follows, we assume that there are no conflicts of interest between sponsors and the financial advisor (that is, the
absence of a moral hazard problem between the financial advisor and the sponsors). This assumption allows us to focus on
the problem of asymmetric information between the financial advisor and the lender.

10
increasing function of the experience of the lender:

1
p(ϕ) = ϕ + ,
2

1
with 0 ≤ ϕ ≤ 2 being a measure of the lenders’ experience in the PF market. If ϕ = 0, then the prob-

ability of each option being a best match is exactly the same, namely p(0) = 12 , and the signal is not

informative. However, if ϕ = 12 , then p( 12 ) = 1 which means that the investor knows perfectly which

option best matches its preference. The information flow in the game is as follows:

(4) Success fees

Sponsors (1) Learn project’s risk Financial advisor

(2) Advice (3) Decision

Potential Lender

Figure 1: Information flow in the game

3.2.2 Contracting between sponsors and financial advisor

Assume that the contract between the sponsors and the financial advisor implies a conditional payment

δA = α × DA that is paid only if and when the project is funded. We assume that the proportion α is

private information between the sponsors and the financial advisor. The financial advisor is not paid

when option B is chosen, thus δB = 0. It is possible to extend the analysis to consider the retainer

fees, which are paid even when the project is not funded. But what is important for our analysis is

the difference between the payments received by the financial advisor in each of the two cases. Let

σ be the advice given by the financial advisor to the lender. At this point, the financial advisor has

always the incentive to send σ = θA to the lender even when its type is B̂. However, when making

11
a recommendation, the financial advisor is not only concerned with the payment δA but also with his

reputation. We stipulate that the financial advisor incurs a reputational cost when the lender ultimately

realizes low utility vl instead of high utility vh . The reputational cost can be written as the product of

lender’s degree of knowledge in the PF market and the lender’s loss in utility:

p(ϕ) × [vh − vl ].

Note that the reputational cost could be reduced when ϕ → 0, meaning when the lender has no experi-
1
ence in the PF market. However, when ϕ → 2 the cost of reputation is very high. The financial advisor

payoff is then

π = α × DA − p(ϕ) × [vh − vl ].

3.2.3 Timeline of the game

The game proceeds in four periods:

• At time t = 1, nature determines the level of project risk. The sponsors and the financial advisor

decide together the level of debt, D. At the same time, the advisor approaches a lender to obtain

D, and makes a recommendation to the lender. Nature decides whether the lender’s preference is

matched with the financial advisor’s preference, but this probability is unobserved. However, the

lender has a prior belief about preference matching.

• At t = 2, the lender privately obtains additional information γ telling him which option is a best

match. The signal is true with the probability p(ϕ) = ϕ + 12 .

• At t = 3, the lender chooses one option based on the probability p(ϕ) and on the recommendation

of the financial advisor.

• At t = 4, the payoffs are realized and the level of utility is known. The game ends. Payoffs are

not discounted and all players are risk-neutral.

12
 At t=4, δ ∈ (0, δA)

Sponsors At t=1, learn σ Financial advisor

At t=2, Advice (θA, θB )

At t=3, D ∈ (0, DA)

Potential Lender

Figure 2: Timeline of the game

3.2.4 Equilibrium: the provision of advice and the lender’s strategies

Since the financial advisor perfectly observes whether preferences are aligned, then:

• If the lender’s type is Â, the financial advisor recommends the lender to invest in the project, i.e.

σ = θA, so as to maximize its payoff: π = α × DA.

• If the lender’s type is B̂, the financial advisor may have incentive to mislead the lender if

α × DA − p(ϕ) × [vh − vl ] ≥ δB = 0

which means, when

∗
α × DA − 21 (vh − vl ) α × DA 1
ϕ ≤ = −
vh − vl vh − vl 2

We assume that the lender can perfectly observe the threshold ϕ ∗ before deciding to invest or not.

Whether the information he gets from the financial advisor is reliable depends on his own level of

experience in the PF market.

Proposition 1 The game yields the following equilibria:

• If ϕ > ϕ ∗ , the lender knows that he will get the relevant information regardless of the preference

alignment. Note that, ceteris paribus, the threshold ϕ ∗ increases with the level of debt. Thus, the

13
 information obtained from the advisor is reliable only when the lender has greater experience. One of

the particularities of PF is the high level of debt in financing the project relative to on-balance-sheet

corporate projects. Therefore, only lenders with greater experience in the PF market are certain to

obtain the relevant information regardless of the preference alignment.

• If ϕ ≤ ϕ ∗ , the lender knows that he will get irrelevant information from the advisor. Thus, he may

worry that the advisor is trying to sell him an excessively risky deal. To invest in the project, the

lender will ask for higher risk premium to compensate for the potential loss caused by the greater

than advertised risk.

Proof 1 Suppose that ϕ > ϕ ∗ , the project will be funded. The lender will invest in the project and will get

a utility level of vh . The financial advisor provides advice σ = θA and will obtain a payoff π = α × DA.

If the lender deviates, his utility will be vl < vh . If the financial advisor provides advice σ = θB , then

his payoff is π = α × DA > 0. The deviation is profitable neither for the lender nor for the financial

advisor. However if ϕ ≤ ϕ ∗ , the financial advisor gives advice σ = θA even though the lender’s type is

B̂. The lender will not invest and his utility will be vh . Suppose the lender deviates. The expected utility

of the lender will be P(γ = θA|Â)vh + (1 − P(γ = θA|Â))vl < vh , which makes the deviating strategy

unprofitable for the lender. Suppose the financial advisor deviates and gives advice σ = θB . Then his payoff

is 0 < π = α × DA − p(ϕ) × [vh − vl ]. The lender will participate in the project only when the loss due to

misleading could be compensated through a higher risk premium, which is the case when vl = vh .

3.3 Testable Hypotheses

The model derived in the previous subsection helps us to develop two testable hypotheses:

• The first hypothesis–Fear of Risk Hypothesis (FR)–states that projects involving FA for a sponsor

will have higher costs of debt than those without FA to a sponsor. This means that the lenders in

the PF market do not rely on the advice given by the FA acting in the sole interest of a sponsor.

On the contrary, the lenders may worry that FA are trying to sell them excessively risky deals. At

best, the presence of FA will have no effect on the cost of debt.

14
 • The second hypothesis–Fear of Advisor Reputation Hypothesis (FAR)–is corollary of the first one.

We posit that FA, who enjoy a higher reputation, have lower reputational costs, so that they may

have more incentive to misselling the lenders. Then, the lenders will be more concerned when FA

to a sponsor enjoy greater reputation. The cost of debt of projects involving higher prestigious FA

will be higher than those involving less prestigious. At best, the use of highly prestigious FA will

have no effect on the cost of debt.

4 Sample and Data

Our sample of projects is from the ProjectWare database provided by Dealogic 5 , which include infor-

mation about 17,236 projects loans worth around US$ 9,617 billion closed, financed, pre-financed or

cancelled between March 2000 and October 2016. As Corielli et al. (2010) stated, the main challenge

with the ProjectWare database is related to the fact that the main relevant information must be extracted

manually by reading the descriptions of each project in PDF files. The data on our proxy variable for

prestige (market share) are not available before 2001. Initially, we extract all PF loans included in Pro-

jectWare and apply a series of filters to select our sample using information about spreads over various

reference rates, maturities, tranche values, floating rates, and PPP projects. Unfortunately, even if Pro-

jectWare includes 2,282 PF loans granted to a total of 2086 PPP projects worth about US$ 815 billion,

there is a lack of information about loan spreads in many cases. Overall, we obtain a sample of 482 loan

tranches after applying our filter, which are worth about US$ 92 billion and which fund 303 different

PPP projects. In our sample, we have 196 deals funded by a single loan tranche and 107 deals funded

by 2-5 individual loan tranches. In our analysis, we consider each loan tranche as a single observation.

Therefore, the data are not independent from one another. To control for this point, we compute stan-

dard errors clustering by deals. For each PF loan in our sample, we collect detailed information about

loan and project characteristics (project location, industrial sectors, tranche maturity, tranche size, fi-
5
As stated Gatti et al. (2013), the ProjectWare database does have some limitations. Indeed, “transactions recorded in
ProjectWare don’t cover the entire universe of project finance transactions assembled in any one year or in a certain country,
given that input to the databases is provided by advisers or arrangers themselves. Moreover, data concerning the majority
of smaller, probably not even syndicated projects assembled at local level are not captured as they are structured directly by
the promoting bank. This limitation become even more critical in more detailed surveys covering an individual country or
geographical area.”

15
nancial closing date, syndicate size, whether the loan is used to refinance an existing project loan, is

from a Development Bank, is from a local Government, is a Mezzanine loan, is guaranteed, is a Revolver

loan, and is subject to currency risk), institutional risk (creditor rights and Governance index), project

risk (capital expenditures), financial advisor characteristics (whether there is a financial advisor only

for sponsors), and financial advisor prestige (market shares of each financial advisor involved in each

project). The dummy variable “currency risk” takes a value of 1 if loan currency is different from the

currency of the host country and 0 otherwise.

The advisor is considered to be a financial advisor when they are listed in ProjectWare’s field “Fi-

nancial Advisors”. Financial advisors are considered to act in interests of one of the sponsors when

they are listed in ProjectWare “Financial advisors to a sponsor” (source: private communication with

a ProjectWare data specialist). Note that there is no PF deal in our sample where FA to a sponsor act

simultaneously as MLA. Moving on to political and regulatory variables, the Governance index is based

on the aggregate governance indicators developed by Kaufmann et al. (2009), which are Voice and ac-

countability, Political stability and absence of violence, Government effectiveness, Regulatory quality,

Rule of law, and Control of corruption. We use the creditor rights data developed by La Porta et al.

(1998). To control for project risk or construction risk, we use capital expenditures as a proxy. Indeed,

projects with higher capital expenditures are larger projects. Larger projects are more complex to launch

(e.g. Esty, 2004a) and present greater construction risk (e.g. Yescombe, 2014). The definitions of each

variable are presented in Appendix A.

4.1 Measure of financial advisor reputation

In the spirit of Gatti et al. (2013) and Rau (2000), we compute “prestige” variables based on one prior

year and three prior year market shares for the FA. To do that, we collect market shares of all FA involved

in each project from the ProjectWare database. ProjectWare lists information about the annual market

share of each financial advisor, where the full amount of a tranche is allocated to each financial advisory.

In ProjectWare league tables, the market share is calculated as the individual financial advisor amount

in percent of the total amount of all FA in the league table. In our analysis, when there is more than

one financial advisor involved in one deal, we compute the sum of market shares of all individual FA.

16
 We compute market shares over one and three years prior to the signing year because one can

imagine that a given financial advisor might have experience, but could be considered less prestigious

based on the prior market share. Thus, considering the two proxies allows us to see whether lenders

consider recent past prestige or longer past prestige to be more relevant. Moreover, PPP contracts can

take more than two years to negotiate. Thus, the relevant level of prestige is that from three years

prior to the signing date. To measure the effect of the reputation of top FA, we compute high-prestige

dummies which take the value of one if the market share of FA falls into the top 25% quartile and zero

otherwise.6

To control whether our results hold for FA listed in the top-10 ProjectWare league table, we download

financial advisor league tables from Dealogic. We compute a top-10 dummy variable which takes the

value of one if a top-10 financial advisor from ProjectWare league tables is retained in the project, and

zero otherwise. In the case of multiple FA, the deal is classified as advised by a top-10 financial advisor

if at least one of the advisors belongs to the top-10 group. This approach is standard in the literature

(see, e.g. Gobulov et al., 2012). Table 1 presents the aggregated market shares of FA from January 1,

2001 to December 31, 2015 extracted from ProjectWare. We report only the top 20 financial advisors

that were active in the global PF loan market. The table 1 reveals one important detail about the type

of firms that are active as FA. Indeed, the table shows that investment banks and professional services

firms (firms that offer only financial advice) have a leadership position in the PF market.

4.2 Descriptive statistics

The table 2 presents the descriptive statistics for our sample of PF loans granted to PPP projects closed

between March 2001 and December 2015. The average loan tranche size is $190.37 million, with a

median of $59.36. The loan tranches range between $0.39 million and $4,956 million. The mean

(median) of spreads is 189.38 (148.5) basis point (bp), with a minimum of 13 and a maximum of

1,100. Although we study PF loans granted to PPP projects, these values do not differ meaningfully

from those reported in previous empirical studies such as Gatti et al. (2013) and Corielli et al. (2010).
6
Fang (2005) argues that, in terms of econometric properties, it is preferable to use a binary classification to measure the
reputation of FA rather than a continuous random variable.

17
The mean (median) of loan maturity is 16.94 years (19 years). The maturity of loans in our data ranges

between 0.25 and 39 years. Compared with the maturities of PF loans granted to all types of projects

(see Gatti et al., 2013; Corielli et al., 2010; Kleimeier & Megginson, 2000), PPP projects arranged using

PF typically have a longer loan maturity. The year indicating when the loan was signed indicates that

the majority of projects closed in 2007, before the financial crisis and Great Recession. The number of

lenders, of participants in tranches, and the number of MLA indicate that syndicate loans of PPP projects

arranged as PF are more concentrated than those of PF for all types of projects reported in studies such

as Gatti et al. (2013) and Corielli et al. (2010). Notice that there is sometimes no MLA in a PPP project.

This occurs when the loan comes from development banks or from partner Governments, for instance.

The number of sponsors is similar to those presented in Corielli et al. (2010). The mean (median) of

the debt-to-total financing ratio is 86.89% (90%) indicating that PPP projects arranged as PF are more

levered than do other projects. For more details on the sectoral, geographical distribution of the PF

deals and the loan tranches, see tables 15, 16, 17, and the figure 3 in appendix A.

18
 Table 1: League table for FA in PF Loans signed between January 1, 2001 and December 31, 2015.
This table is obtained from Dealogic ProjectWare predefined league table for all PF loan tranches. We report only the top 20
financial advisors that were active as financial advisors in the global PF loan market from 2001 to 2015.

Rank Financial Advisor Nb. of PF Total value Market share

transactions (US$m) (%) by value
Top-ten
1 HSBC 148 188,465.99 5.90
2 PwC 321 167,877.29 5.25
3 Ernst & Young 320 142,669.51 4.46
4 Royal Bank of Scotland 63 142,283.49 4.45
5 BNP Paribas 126 141,612.06 4.43
6 Macquarie 184 137,830.90 4.31
7 Societe Generale 83 135,899.10 4.25
8 KPMG 290 125,690.19 3.93
9 State Bank of India 157 107,983.08 3.38
10 Sumitomo Mitsui Financial Group 58 98,520.38 3.08
Non-Top-ten (shown from Top − 11 th to Top − 20 th )
11 Citigroup 73 96,154.58 3.01
12 Credit Agricole Group 41 75,607.64 2.37
13 Deloitte 146 69,468.96 2.17
14 Royal Bank of Canada 103 68,422.76 2.14
15 Credit Suisse 48 56,409.88 1.76
16 Deutsche Bank 40 54,913.36 1.72
17 Santander 105 45,244.76 1.42
18 UBS 23 44,839.56 1.40
19 JPMorgan 31 42,047.80 .54
20 Mitsubishi UFJ Financial Group 37 39,714.84 .53

19
 Table 2: Descriptive statistics for Project Finance Loans Sample, 2001-2015
The following table presents descriptive statistics for PPP projects that used the project finance arrangement. We used loan
tranches with spread, maturity of debt, and tranche size available. For a definition of the variables, see the table in appendix
A.

Mean Median Std Min. Max. Nb. of

tranches
Loan Characteristics
tranche size (US$m) 190.37 59.36 472.71 0.39 4956 482
tranche spread (in bps) 189.38 148.5 146.78 13 1100 482
tranche maturity (in years) 16.94 19 8.99 0.25 39 482
year of loan signing 2007 2007 3.43 2001 2015 482
number of lenders in tranche 4.07 3 3.56 1 34 482
number of MLA in tranche 3.12 2 3.15 0 27 482
number of participants in tranche 0.42 0 1.67 0 22 482
number of sponsors in tranche 2.56 2 1.77 1 12 482
tranche size with currency risk 183.31 35.04 578.66 0.44 4,956 186
tranche size for Refinancing 329.12 150 445.56 4.7 1,816.54 49
tranche size with Guarantee 102.98 69.28 128.34 7.54 392.17 8
tranche size/total loan size (%) 55.68% 57.57% 36.84% 0.26% 100% 482
Project Characteristics
project value ($m) 447.82 171.02 823.07 11.86 6,356 482
leverage (debt ratio) 86.89% 90% 14.58% 26% 100% 482
Country/Institutional quality indicators
creditor rights 2.48 3 1.35 0 4 482
Governance Index 77.76 83.85 14.82 30.09 95.43 478
Tranches size signing (US$m)
for the crisis period 128.12 42.93 308.24 0.39 3,247.18 284
during the crisis period 172.70 65.19 338.64 0.53 3,085.29 140
after the crisis period 537.82 166.19 995.70 1.76 4,956.00 58
Tranches spread signing (in bps)
for the crisis period 167.39 117.5 158.43 13 1,100 58.92%
during the crisis period 218.37 220 125.39 40 857 29.05%
after the crisis period 227.07 200 113.75 100 623 12.03%

20
5 Empirical Analysis

5.1 Methodology for estimating the influence of financial advisors on loan spreads

The model we use is as follows:

2
X
Loan Spread (bps) = α + β × FA dummy + ρi × Institutional and legal risk proxies (1)
i
X
+ ϕi × Loan characteristics + δ × Project risk
i
8
X X
+ φi × Industry risk dummies + γi × Year dummies
i i

+λ × Dummy 2008 − 2010 financial crisis + ".

The institutional risk proxy is based on the aggregate governance indicators developed by Kaufmann

et al. (2009). Their index measures the average of six dimensions of governance for over 200 countries

and territories over the period 1996-2015: Voice and accountability, Political stability and absence of

violence, Government effectiveness, Regulatory quality, Rule of law, and Control of corruption. A low

value for the governance index indicates a high level institutional risk, while a high index value indicates

low risk. In line with the existing literature, we expect a negative relationship between the governance

index and the loan spread (Kleimeier & Megginson, 2000; Girardone & Snaith, 2011). Indeed, greater

government stability, for instance, would reassure the lenders that the project cash flows would not

be negatively affected by a government administration change. This implicit insurance, provided by a

better level of institutional quality, should induce lenders to reduce the loan spread. For the legal risk

proxy, we use the creditor rights variable developed by La Porta et al. (1998). A high value of creditor

rights indicates a better legal system, implying greater legal protection for lenders. Thus we expect

a negative relationship between creditor rights and loan spreads. Indeed, PF deals in countries with

weaker legal rules protecting lenders would require greater cash flow monitoring, leading to higher

loan spreads. Gatti et al. (2013) find evidence of this negative relationship in their study. While our

horizon is longer than that used by La Porta et al. (1998) to compute their creditor rights index, it can

nonetheless be used for our analysis. Indeed, Djankov et al. (2007) show that few reforms affected

21
the La Porta et al. (1998) creditor index, and they find evidence that wealthier countries have more

reforms than do poorer countries. In addition to the FA dummy and the governance and creditor rights

variables, we include eight other variables:

1. The log maturity of loan and tranche size.7 We expect that loans with longer maturities will cost

more due to standard economic arguments. Blanc-Brude and Strange (2007) find this negative

relationship for PF loans granted to PPP projects in the case of European Union toll roads. We also

expect that the tranche size (the volume of debt for each tranche) should be negatively related to

the loan spread, because only creditworthy borrowers should be able to obtain largers volumes of

loans.

2. To control for the nature of the loan, we include dummies for loans from Government or from

Development banks. We expect that Developement bank loans should be cheaper than Term loans,

because Development banks can use their influence to reduce political risks (Hainz & Kleimeier,

2012). Government loans should be more expensive than Term loans because of their limited

budget. Moreover, since Revolver loans and Mezzanine loans have different risk characteristics

than Term loans, we also include a dummary variable for each. Indeed, Mezzanine loans assign

to lenders a call option on the equity of the SPV, and as a result they are riskier than Term loans,

while Revolver loans (short-term loans) provide more flexibility to the borrower, for example in

terms of repayment. In contrast, Term loans (long-term loans) are repaid in regular payments.

As with Blanc-Brude and Strange (2007), we expect that Mezzanine loans will be more expensive

than Term loans, and that the Revolver loans will be cheaper than Term loans.

3. To address credit risk, we include dummies indicating whether the loan is guaranteed or is subject

to currency risk. The existing literature shows that a third-party guarantee reduces the loan spread

(Kleimeier & Megginson, 2000; Gatti et al., 2013). We expect the cost of debt to be increasing

in currency risk. When there is currency risk, the lenders will use futures contracts, options, or

currency swaps to protect themselves, inducing to higher loan spreads.

7
To avoid the possibility that some outliers might influence the distribution of the residuals, we compute the logarithm of
the maturity of loans and of the tranche size.

22
 4. We include a dummy to indicate whether the loan is used to refinance an existing project loan.

In this case, important risks such as those relating to construction are resolved. More generally,

this distinguishes loans to Brownfield projects from loans to Greenfield projects. Therefore, we

expect refinancing loans to be cheaper than a Term loan.

5. We include the syndicate size, as loan tranches with a less concentrated syndicate size should have

a lower spread. This is because the more lenders in the syndicate, the more they are protected

against strategic default.

6. Because projects with higher construction risk should have higher spreads, we include the capital

expenditure (Blanc-Brude & Strange, 2007).

7. Additionally, we include industrial sector dummies indicating whether the project is in mining,

transportation, telecoms, water & sewage, power, renewables, social and defense, or oil and gas

sectors. Indeed, projects in sectors such as mining are riskier than projects in sectors such as social

and defense. In this case, the loan spreads should be different.

8. To allow credit risk to vary over time, we add year dummies.

5.2 Univariate test for spreads

We begin our analysis by performing a univariate test on characteristics of loans (tranche spread and

tranche size) and projects (project value, capital expenditures, and debt ratio). We sort our data in

two groups: the first group contains loan spreads for projects where a financial advisor to a sponsor

is involved, while the second group contains loan spreads where no financial advisor to a sponsor is

involved. We compute the median of project value, tranche size (volume of the debt), tranche spreads,

capital expenditures, and debt ratio of each group, and we test the difference with a Wilcoxon z-test.

Results are presented in table 3. The results suggest that projects involving a financial advisor to a

sponsor (highly prestigious FA to sponsor) have lower value and obtain a lower tranche size than projects

without such an advisor. The results also indicate that there appear to be no difference in terms of

Tranche spread and Capital expenditures (proxies for the project’s risk) for projects with financial advisor

23
(highly prestigious FA to sponsor) to a sponsor and those without. However, the results suggest that

a financial advisor to a sponsor (highly prestigious FA to sponsor) is able to structure the project with

a higher level of debt than without the advisor. Overall, we have the same conclusions for projects

involving top-10 FA from ProjectWare league tables and those without.

To test whether the results about the loan spreads in table 3 remain when we consider the 2008-

2010 financial crisis, we perform the Wilcoxon z-test on the median of loan spreads before, during, and

after the crisis period. The results are presented in table 4. The results suggest that PF deals involving

FA to a sponsor (highly prestigious FA to sponsor) have higher loan spreads than do PF deals without

FA to a sponsor (highly prestigious FA to sponsor), especially before the 2008-2010 financial crisis.

Table 3: Loan characteristics and median difference tests.

The following table presents the project value, the tranche size, the tranche spread and the capital expenditure of projects
with FA to the sponsor versus without. We used loan tranches with spread, maturity of debt, and tranche size available. For a
definition of variables, see the table in appendix A.

(Yes) (No) Median diff. Wilcoxon Number

(in bp) z-test of tranches
FA to a sponsor
Project value (US$m) 159.39 (115) 182.31 (367) −22.92 2.71∗∗∗ 482
Tranche size (US$m) 37 (115) 69.59 (367) −32.59 2.94∗∗∗ 482
Tranche spread (in bps) 138 (115) 150 (367) −12 0.65 482
Capital expenditure (US$m) 204 (80) 209.40 (248) −5.4 0.40 328
Debt ratio 0.93 (115) 0.89 (367) 0.04 −4.29∗∗∗ 482

Highly prestigious FA to a sponsor

Project value (US$m) 91.02 (21) 173.53 (461) −82.51 1.93∗ 482
Tranche size (US$m) 38.95 (21) 60 (461) −21.05 2.25∗∗∗ 482
Tranche spread (in bps) 150 (21) 145 (461) 5 −0.87 482
Capital expenditure (US$m) 246 (15) 204 (313) 42.13 0.32 328
Debtratio 1 (21) 0.90 (461) 0.1 −3.69∗∗∗ 482

FA to a sponsor belonging to top-10

Project value (US$m) 168.77 (48) 172.28 (434) −3.51 1.01 482
Tranche size (US$m) 36.54 (48) 63.82 (434) −27.28 1.96∗∗ 482
Tranche spread (in bps) 109 (48) 150 (434) −41 1.69∗ 482
Capital expenditure (US$m) 209 (37) 204 (291) 3 0.51 328
Debt ratio 0.99 (48) 0.90 (434) 0.09 −2.97∗∗∗ 482
*Significant at the 0.10 level
**Significant at the 0.05 level
***Significant at the 0.01 level

24
 Table 4: Credit spread and median difference tests.
The following table presents credit spreads medians and the wilcoxon z-test for the differences. Because the variable credit
spread is not normally distributed, we computed the nonparametric equality test of wilcoxon. In the parenthesis, we have the
number of tranches.

(Yes) (No) Median diff. Wilcoxon Number

(in bp) z-test of tranches
Before the 2008 banking crisis
FA to a sponsor 135 (91) 100 (193) 35 −2.55∗∗∗ 284
Highly prestigious FA to a sponsor 175 (16) 113 (268) 62 −2.43∗∗∗ 284
FA to a sponsor belonging to top-10 109 (38) 120 (246) −11 −0.71 284

During the 2008 - 2010 banking crisis

FA to a sponsor 200 (21) 225 (119) −25 1.43 140
Highly prestigious FA to a sponsor 70 (5) 220 (135) −150 1.82∗ 140
FA to a sponsor belonging to top-10 65 (7) 225 (133) −160 2.82∗∗∗ 140

After the 2008 - 2010 banking crisis

FA to a sponsor 140 (3) 200 (55) −60 1.36 58
Highly prestigious FA to a sponsor 0a
FA to a sponsor belonging to top-10 140 (3) 200 (55) −60 1.36 58
*Significant at the 0.10 level
**Significant at the 0.05 level
***Significant at the 0.01 level
0a means that there is no observations.

5.3 Empirical results

We reexamine the effect of the presence of financial advisors to a sponsor and of its reputation on loan

spreads using the OLS model. Table 5 shows the correlation between the variables of our model. There

is no problem of multicollinearity. The results of our OLS regression are shown in table 6. As expected,

we find that the loan spread increases with the project’s risk (proxied using capital expenditures). Al-

though we find that creditor rights have no effect on the loan spreads, the results show that lenders

appreciate the implicit insurance provided by a better institutional quality. Indeed, the coefficient for

the governance index is negative and significant at 1% level, which is consistent with the existing litera-

ture. Unexpectedly, we find that loans granted to PF deals to finance PPP projects were cheaper during

the 2008-2010 financial crisis. This could be explained through the willingness of lenders in such a

critical period to invest only in “safe” projects. Because PF involves the use of numerous nonfinancial

25
contracts aiming to allocate the project’s risks among partners, and most often involves third-party guar-

antees, lenders would prefers such investments that have more stable revenues than those in the stock

market. In such circumstances, lenders would be willing to reduce the cost of debt during the financial

crisis period to participate in the PF market.

Table 6 presents the results for our two main hypotheses (the impact of the presence of and the

reputation of FA to a sponsor), which motivate this paper. The results confirm our Fear of Risk Hypothesis

(FR) and our Fear of Advisor Reputation Hypothesis (FAR). Indeed, the column (1) of the table 6 shows

that the loan spread increases when a FA to a sponsor is involved in the project. The coefficient is

positive and significant at the 10% level, which is consistent with the intuition that lenders will fear

being misled when sponsors hire a financial advisor. As expected, we also find that lenders will be

more concerned when FA enjoy a higher reputation. Specifically, the coefficients in columns (2) and

(3) for the reputation (highly prestigious FA to a sponsor, and FA to a sponsor belonging to the top-10)

are greater, positive and significant at the 10% level. In sum, PF deals involving FA to a sponsor are

more expensive, between 43 bp and 107 bp dearer, than PF deals without FA to a sponsor. This finding

is in line with Gatti (2013, p. 179), who states that “lenders will worry that FA will try to sell them

excessively risky projects. This fear will induce FA to structure the deal in a manner to favor lenders

with the aim to obtain the debt, which will lead to higher cost of debt for sponsors.”

However, the estimation model in equation (1) assumes that all explanatory variables are exoge-

nously determined. This means that the decision to hire financial advisors is exogenous, which seems to

be inconsistent with the findings in table 3. Indeed, table 3 shows that there are significant differences in

project value, debt ratio, and tranche size between deals with and without FA to a sponsor (highly pres-

tigious FA to a sponsor). These results suggest that the decision to hire FA (highly prestigious FA) could

be determined endogenously. In this case, a self-selection bias could emerge, leading the OLS model

to overstate the effects of the reputation of FA on loan spreads. To obtain the endogeneity-controlled

effect of the presence and the reputation of FA on loan spreads, we implement the two-step procedure

proposed by Heckman (1979) in the next section.

26
 Table 5: Correlation Matrix
The following table presents pairwise correlations of the variables. For a definition of the variables, see the table in appendix A.

Tranche Financial Creditor Governance Capital Refinancing Tranche Tranche Dev. Gov. Guarantee Mezzanine Revolver Currency Syndicate Scope
spread crisis Rights Index expenditure loan maturity size Bank loan loans loans loans loans risk size variable

Tranche spread 1
Financial crisis 0.124∗∗∗ 1
Creditor Rights 0.016 0.109∗∗ 1
Governance Index −0.224∗∗∗ 0.041 0.259∗∗∗ 1
Capital expenditure 0.126∗∗ 0.061 −0.081 −0.036 1
Refinancing loans −0.055 −0.094∗∗ 0.006 0.088∗ 0.246∗∗∗ 1
Tranche maturity 0.076∗ 0.212∗∗∗ 0.253∗∗∗ 0.121∗∗∗ −0.015 −0.067 1
Tranche size 0.048 −0.011 −0.217∗∗∗ −0.085∗ 0.516∗∗∗ 0.184∗∗∗ 0.089∗ 1
Dev. Bank loans −0.006 0.075∗ 0.021 0.000 0.048 −0.041 0.084∗ 0.066 1
Gov. loans 0.042 0.071 0.051 0.023 0.281∗∗∗ −0.015 0.031 0.0327 −0.006 1
Guarantee loans −0.053 0.024 −0.011 0.005 −0.017 −0.044 0.032 −0.013 −0.016 −0.006 1
Mezzanine loans 0.197∗∗∗ −0.072 −0.041 −0.054 −0.026 0.024 0.055 −0.071 −0.014 −0.005 −0.015 1
Revolver loans −0.065 −0.029 −0.031 0.015 0.002 −0.049 −0.104∗ −0.139∗∗∗ −0.018 −0.007 −0.019 −0.016 1
Currency risk 0.133∗∗∗ −0.085∗ 0.028 −0.421∗∗∗ −0.075 −0.126∗∗∗ −0.077∗ −0.161∗∗∗ 0.046 −0.036 −0.070 −0.051 0.034 1
Syndicate size −0.025 −0.036 −0.103∗∗ −0.070 0.343∗∗∗ 0.177∗∗∗ −0.085∗ 0.455∗∗∗ −0.051 −0.039 0.025 −0.076∗ −0.015 0.064 1
Scope variable −0.0163 0.1995∗∗∗ 0.1286∗∗∗ 0.1632∗∗∗ 0.1376∗∗ 0.033 0.274 0.091 0.081∗ 0.044 −0.038 −0.005 −0.065 −0.1301∗∗∗ 0.022 1
*Significant at the 0.10 level; **Significant at the 0.05 level; ***Significant at the 0.01 level

27
 Table 6: Cross-sectional regression analysis (OLS) of the FR and the FAR Hypotheses
The table presents results of the cross-sectional OLS regression analysis of the impact of the presence and reputation of FA on
loan spreads and other project-and deal-specific characteristics for a sample of PPP projects over the period of 2001 to 2015
from the ProjectWare database. The variables are defined in appendix A. The first column is the OLS regression estimated
with White-corrected standard errors testing for the effect on loan spreads of the presence of FA in the deals. The second
column investigates the effect of the reputation of FA (highly prestigious FA) on loan spreads. The third column examines the
effect of the reputation of FA (Top-10 ProjectWare league table) on loan spreads. Although we identify some outliers, Cook’s
distance reveals that these outliers do not have an influence on the results. The t-statistics are in parentheses (z-statistics for
the probit regression). The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

Variable Presence Reputation Reputation

(1) (2) (3)
Intercept 434.206∗∗∗ 413.319∗∗∗ 425.175∗∗∗
(6.66) (6.42) (6.56)
Dummy 2008-2010 Financial crisis −95.754∗∗∗ −86.661∗∗∗ −84.183∗∗∗
(−2.87) (−2.64) (−2.55)
Dummy Currency risk 19.693 29.367 24.988
(0.93) (1.44) (1.21)
Capital expenditure 0.012∗∗ 0.011∗ 0.011∗
(1.96) (1.71) (1.67)
Governance Index −2.951∗∗∗ −2.780∗∗∗ −2.952∗∗∗
(−3.96) (−3.64) (−3.88)
Creditor Rights 10.715∗ 8.740 10.347
(1.67) (1.41) (1.62)

Presence of FA to a sponsor 43.081∗

(1.85)
Highly prestigious FA to a sponsor 106.757∗
(1.72)
FA to a sponsor belonging to top-10 48.180∗
(1.69)
Control variables
Loan and project characteristics yes yes yes
Industry dummies yes yes yes
Year dummies yes yes yes
Sample size 325 325 325
Adjusted R2 0.1412 0.1499 0.1379

5.4 Robustness tests

5.4.1 Control for potential endogeneity

Sponsors might hire FA only when the project is complex and particularly risky. In this case, the negative

effect of the presence and reputation of financial advisor that we found in the last section would reflect

28
also the ex-ante higher risk of the project. To control for this self-selection bias, we implement the

two-step procedure proposed by Heckman (1979). The first step of this procedure models the decision

to hire a financial advisor (or the choice between highly prestigious FA and less highly prestigious FA).

This selection model takes the form of equation (2):

FA dummy = α + β × Scope + λ × Dummy 2008 − 2010 financial crisis (2)

2
X
+ ρi × Institutional and legal risk proxies + δ × Project risk
i

+ϕ × Dummy Currency risk + µ.

The choice of our instruments is inspired by Fang (2005), Gobulov et al. (2012) and Gatti et al. (2013).

First, we construct the variable Scope, which is our identification restriction. That is, it affects the

decision to hire (prestigious) FA, but does not affect the loan spread. The variable Scope measures the

extend to which sponsors in the project used (prestigious) FA in the past. The Scope variable takes the

value of one if, in the 5 years prior the deal, at least one of the sponsors employed a financial advisor

and zero otherwise. As Gatti (2013) stated, the likelihood to hire a FA in PF deals decreases with the

experience of sponsors in the PF market. As stated Edwards et al. (2012, p. 28), FA collaborate with

sponsors to their projects and share some scope of knowledge with the latter. If at least one sponsor

used the service of FA in the last 5 year prior the deal, then he gained a scope of knowledge (experience)

so that his needs for outside advice (the likelihood of hiring a FA) decreases. Therefore, we expect a

negative coefficient for the scope variable. Second, we consider the dummy 2008-2010 financial crisis

and expect a negative coefficient suggesting that FA have lower bargaining power during this abnormal

period. Third, like Gatti et al. (2013), we use the institutional risk proxies and the dummy currency risk

and expect a positive coefficient suggesting that FA are more likely to be hired in case of poor institutional

quality and creditor rights. Additionally, we consider the project’s risk (i.e., capital expenditures) since

FA are more likely to be hired for projects with greater construction risk.

Given the binary nature of the dependent variable of the first step, equation (2) is estimated using

a probit model with bootstrapped standard errors, and the computed inverse Mills ratio is added in the

29
equation of the second step as an endogeneity control. If µ and " are correlated, then OLS estimation

is inconsistent. To control for this self-selection bias, we add in the second step the inverse Mills ratio

to equation (1) and estimate it with the OLS model:

2
X
Loan Spread (bps) = α + β × FA dummy + ρi × Institutional and legal risk proxies (3)
i
X
+ ϕi × loan and characteristics + δ × Project’s risk
i
8
X X
+ φi × industry risk dummies + γi × year dummies
i i

+λ × Dummy 2008 − 2010 financial crisis + υ × MILLS + ".

The coefficient υ indicates whether unobserved sponsor characteristics that increase or decrease the

likelihood of FA to be hired in a project (or the likelihood of choosing a highly prestigious FA) further

increase or decrease the loan spread. The coefficient β indicates the effect of FA (reputation) controlling

for endogeneity (the self-selection bias). This model appears in Gatti et al. (2013), Fang (2005), Gobulov

et al. (2012), Puri (1996) and Gande et al. (1999).8

Table 7 presents the results of this analysis. While model (1) shows the results of this analysis for

our FR Hypothesis (the presence of FA to a sponsor), models (2) and (3) show the results of this analysis

for our FAR Hypothesis (FA reputation). The scope variable of the first stage of these three models is

negative and highly significant (at the 1% level), confirming that the presence or the choice between

highly prestigious FA and non-highly prestigious FA depends on the experience of sponsors, consistent

with Gatti (2013). That is, the extent to which sponsors in the project have used (prestigious) FA in

the past reduces the probability that a FA (highly prestigious) will be hired. As expected, models (1)

and (3) show that the probability to hire a (prestigious) FA is negatively and significantly related to the

financial crisis period, confirming that sponsors assign lower bargaining power to FA during abnormal

periods. While model (1) shows that currency risk does not affect the probability of hiring a FA, models

(2) and (3) show that currency risk reduces the probability of hiring a prestigious FA. Unexpectedly,

we find that construction risk does not affect the probability of hiring a FA or a highly prestigious FA.
8
See Maddala (1983) for more details on the treatment of self-selection bias.

30
Construction risk plays a role only on the choice between a top-ten FA and non-top-ten FA. Thus, the

probability that a sponsor chooses a top-ten FA increases with the project’s risk. However, institutional

quality and creditor rights do not affect the probability of hiring (prestigious) FA. Even when we control

for a potential self-selection bias (endogeneity), the second stage of the three models confirms that the

loans granted to PF deals to finance PPP projects are cheaper during the financial crisis, and that the

loan spread is increasing in project risk and decreasing in institutional quality. While the results suggest

that the presence and the reputation of FA increase the loan spread, only the coefficient for model (2)

is significant (at the 1% level). The inverse Mills’ ratio for model (2) is negative and significant (at the

10% level), suggesting that unobserved sponsor characteristics, which decrease the likelihood of hiring a

highly prestigious FA, further decrease the loan spread. Overall, the results confirm our FAR Hypothesis,

even when controlling for possible self-selection bias. Thus, PF deals involving highly prestigious FA

to a sponsor are more expensive, specifically 569 bp dearer, than PF deals with less prestigious FA to

a sponsor. So far, we have shown evidence that the use of highly prestigious FA to a sponsor increases

the cost of debt in PF projects. To identify whether the negative effects of the presence of FA that we

have found in table 6 are associated with the type of advisor, we conduct a new analysis of the data

controlling for the type of advisor, specifically the issue of only professional services firms versus mixed

firms as FA.

5.4.2 Professional services firms

As shown in the table 1, the financial advisory market is dominated by investment banks (e.g. HSBC)

and professional services firms (e.g. PwC). The main advantage of hiring an investment bank as FA is

their proximity to the credit market, providing lending facilities to the sponsors. However, the possibil-

ity that the investment bank could participate as lender in the project leads to a lack of independence

in terms of judging the funding sources and securing the most aggressive final terms for the financing.

Therefore, this independence represents the main advantage of hiring a professional services firm. In-

deed, professional services firms offer only financial advice, and are free of such conflicts of interest.

However, the lack of any underwriting commitment from professional services firms, and their inability

to directly provide lending is their main disadvantage (See Gatti et al., 2013; Edwards et al., 2012, for

31
more details). This disadvantage of professional services firms may cause potential lenders to fear that

they are trying to sell them an excessively risky deal, leading to higher loan spreads. To test our FR Hy-

pothesis and FAR Hypothesis, we compute a new (highly prestigious) financial advisor dummy variable

which takes a value of one if the retained (highly prestigious) FA to a sponsor are only professional ser-

vices firms, and zero otherwise. Note that for all PF deals where highly prestigious FA to a sponsor have

been hired, the advising firm is only of the professional services firm type. Using the other independent

variables, we apply the Heckman two-stage procedure as described in section 5.4.1. The results are

presented in table 8.

As in section 5.4.1, results in table 8 show that the ‘scope’ variable plays an important role in the

decision to hire (highly prestigious) professional services firms as FA and that the project’s risk, institu-

tional quality, and creditor rights do not affect this decision. Contrary to section 5.4.1, here currency

risk affects the probability of hiring (highly prestigious) professional services firms as FA. Indeed, the

coefficient is negative and significant (at a 1% level), suggesting that sponsors consider the importance

of currency risk management when deciding whether to hire a professional services firm as advisor.

Results for model (1) in the table 8 show that the presence of professional services firms acting as FA

to a sponsor is associated with higher loan spreads. Indeed, the coefficient is positive and significant

(at a 5% level). Moreover, the inverse Mills’ ratio for model (1) is negative and significant (at a 5%

level), suggesting that unobserved sponsor characteristics, which decrease the likelihood of hiring a

professional services firms acting as FA to a sponsor, further decrease the loan spread. Thus, this result

confirms our FR Hypothesis. Models (2) and (3) show the results for the effect of prestigious professional

services firms acting as FA to a sponsor. Model (2) confirms our previous findings. Overall, PF deals

involving professional services firms acting as FA to a sponsor are more expensive, between 306 bp and

569 bp dearer, than PF deals without professional services firms acting as FA to a sponsor.

Therefore, we have provided evidence that the use of professional services firms (or highly presti-

gious such firms) as FA to a sponsor increases the cost of debt, confirming our FR Hypothesis and FAR

Hypothesis. To identify why sponsors hire FA, given their negative effect, we analyze their effect on the

project’s debt ratio.

32
 Table 7: Heckman Two-stage procedure — The FR and the FAR Hypothesis
The table presents results of the cross-sectional Heckman two-stage procedure of the impact of the presence and reputation of FA on loan spreads and other project-
and deal-specific characteristics for a sample of PPP projects over the period of 2001 to 2015 from ProjectWare database. Variables are defined in appendix A. Model
(1) presents the results for the presence of FA. The first column is the first-stage selection equation estimated by probit regression using bootstrapping to obtain
standard errors, where the dependent variable equals one if FA acting to the sole interest of a sponsor are retained and zero otherwise. The second column of
model (1) is the second-stage equation, where the dependent variable is the loan spread over various reference rates and the inverse Mills’ ratio adjusts for potential
endogeneity. The ‘scope’ variable takes the value of one if, in the 5 years prior to the deal, at least one of the sponsors employed financial advisors acting to his sole
interest, and takes the value zero otherwise. Model (2) presents the results for the reputation effect (Highly prestigious FA), where the first column is the selection
model and the second column is the second-stage equation of Heckman. Model (3) presents the results for the reputation of FA (Top-10 ProjectWare league table),
where its first column is the selection model and the second column is the second-stage equation of Heckman. Once again, although we identify some outliers Cook’s
distance suggests that the outliers do not affect the results. The t-statistics are in parentheses (z-statistics for the probit regression). The symbols ∗, ∗∗ and ∗ ∗ ∗
denote statistical significance at 10%, 5% and 1% levels, respectively.

(1) Presence (2) Reputation (3) Reputation

First stage Second stage Fisrt stage Second stage First stage Second stage

Intercept −0.807∗ 440.916∗∗∗ −2.767 410.381∗∗∗ −3.014∗∗∗ 449.976∗∗∗

(1.84) (5.37) (−0.37) (5.13) (−4.63) (4.35)
Scope −0.426∗∗∗ −0.694∗∗∗ −0.689∗∗∗

33
(−2.70) (−2.40) (−4.63)
Dummy 2008-2010 Financial crisis −0.582∗∗∗ −101.865∗∗ −0.427 −77.172∗∗∗ −0.943∗∗∗ −83.723
(3.45) (−2.73) (−0.26) (−2.14) (−3.59) (−1.10)
Dummy Currency risk 0.056 18.361 −4.549∗∗∗ 65.392∗∗ −0.727∗ 35.471
(0.24) (0.80) (11.14) (2.03) (−1.85) (0.94)
Capital expenditure 3.30e − 07 0.013∗∗ −0.0005 0.0147∗ 0.0001∗∗ 0.009
(0.01) (2.13) (−0.34) (1.73) (2.02) (1.41)
Governance Index 0.005 −3.043∗∗∗ 0.016 −2.981∗∗∗ 0.027∗ −3.371∗∗∗
(0.89) (−3.47) (0.20) (−3.96) (1.79) (−4.75)
Creditor Rights 0.039 10.539 0.216 0.734 0.123 9.382
(0.42) (1.49) (1.33) (−0.08) (1.16) (1.55)

Presence of FA to a sponsor 95.797

(0.90)
Highly prestigious FA to a sponsor 569.342∗∗∗
(2.40)
FA to a sponsor belonging to top-10 169.821
(1.23)
Mills’ ratio −42.935 −247.146∗ −70.794
(−0.67) (1.90) (−0.94)
 Table 8: Heckman Two-stage procedure — The FR and the FAR Hypothesis — Only professional services firms versus other types
The table presents results of the cross-sectional Heckman two-stage procedure of the impact of the presence and reputation of FA on loan spreads and other project-
and deal-specific characteristics for a sample of PPP projects over the period of 2001 to 2015 from the ProjectWare database. The variables are defined in appendix
A. Model (1) presents the results for the presence of FA. The first column is the first-stage selection equation estimated by probit regression using bootstrapping to
obtain standard errors, where the dependent variable is one if FA acting to the sole interest of a sponsor are retained and if the advising firms are all professional
services firms, and zero otherwise. The second column of model (1) is the second-stage equation, where the dependent variable is the loan spread over various
reference rates and the inverse Mills" ratio adjusts for potential endogeneity. The ‘scope’ variable takes the value of one if, in the 5 years prior to the deal, at least
one of the sponsors employed FA acting to his sole interest and zero otherwise. The model (2) presents the results for the reputation (Highly prestigious FA), where
its first column is the selection model and the second column the second-stage equation of Heckman. The model (3) presents the results for the reputation of FA
(Top-10 ProjectWare’ league table) , where its first column is the selection model and the second column the second-stage equation of Heckman. Once more, we
identify a few outliers, but based on Cook’s distance the results are not affected by these outliers. The t-statistics are in parentheses (z-statistics for probit regression).
The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

(1) Presence (2) Reputation (3) Reputation

First stage Second stage Fisrt stage Second stage First stage Second stage

Intercept −3.305 436.380∗∗∗ −2.767 410.381∗∗∗ −3.463 437.497∗∗∗

(−0.52) (5.32) (−0.43) (5.13) (−0.33) (6.20)
Scope −0.710∗∗∗ −0.694∗∗∗ −0.940∗∗∗

34
(−2.76) (−2.50) (−2.79)
Dummy 2008-2010 Financial crisis −0.299 −82.512 −0.427 −77.172∗∗∗ −0.327 −88.704∗
(1.43) (−1.59) (−0.40) (−2.14) (−0.25) (−1.90)
Dummy Currency risk −4.176∗∗∗ 50.62 −4.549∗∗∗ 65.392∗∗ −4.706∗∗∗ 46.597∗
(19.25) (1.62) (17.82) (2.03) (−10.40) (1.66)
Capital expenditure −0.007∗ 0.0150∗∗ −0.0005 0.0147∗ −0.007 0.014∗∗
(−1.88) (2.00) (−0.53) (1.73) (−0.62) (1.99)
Governance Index 0.0277 −3.195∗∗∗ 0.016 −2.981∗∗∗ 0.027 −3.097∗∗∗
(0.40) (−4.68) (0.22) (−3.96) (0.24) (−3.84)
Creditor Rights 0.0157 5.213 0.216 0.734 0.227∗ 5.272
(0.99) (0.76) (1.42) (−0.08) (1.21) (0.76)

Presence of FA to a sponsor 305.695∗∗

(2.32)
Highly prestigious FA to a sponsor 569.342∗∗∗
(2.40)
FA to a sponsor belonging to top-10 296.781
(1.56)
Mills’ ratio −146.891∗∗ −247.146∗ −129.415
(−2.12) (1.90) (−1.50)
5.5 Effect of financial advisors on the debt ratio

A natural question that arises from our findings is why sponsors would hire FA given the negative effect

on loan spreads. Following Gatti (2013), we argue that they hire FA to increase the project’s debt ratio.

To test empirically this hypothesis, we examine the determinants of the debt ratio by controlling for the

presence and the reputation of FA. We expect both variables to be positively related to the debt ratio. We

use the same model as in sections 5.1 and 5.4.1, with the financial advisor dummy variable taking the

value of one if a (highly prestigious) FA to a sponsor is involved in the PF deal, and zero otherwise. Thus,

we do not control for the type of advisor (professional services firm or not) in this section. We expect a

positive relationship between the debt ratio and the financial crisis period, which would be consistent

with the willing of lenders during critical periods to invest in “sure” project such as PPP projects, relative

to other available lending opportunities. Moreover, we expect currency risk to be negatively related to

the debt ratio, suggesting the willingness of lenders not to manage this risk. While project risk should

reduce the level of debt provided, the institutional quality as well as the legal protection of lenders

(creditor rights) should increase the debt ratio. The main difference relative to the econometric models

in sections 5.1 and 5.4.1 is the use of Tobit models instead of OLS regressions. This is done because

the debt ratio is a variable that cannot take values above 1, hence it is right censored. As Tobin (1958)

shown, the OLS regression would lead to inconsistent estimation of the slope parameters. Therefore,

we apply a maximum likelihood estimation of a Tobit model for equations (1) and (3), respectively. The

table 9 shows the results of this analysis. The Tobit regressions in models (1) and (2) show a positive

relationship between the debt ratio and the financial crisis period. This does not support the intuition

that lenders prefer “sure projects” during this tumultuous period. However, the legal protection of

lenders (creditor rights) increases the debt ratio. Its coefficients are positive and significant (at a 1%

level). The results from the Tobit regression in model (1) show that the presence of FA to a sponsor

increases the debt ratio by 5.4% (significant at a 1% level). When the FA enjoy a higher reputation, the

results from the Tobit regression in model (2) show that the debt ratio increases by 6.5% (significant

at a 5% level). While the marginal effects of the presence and the reputation of FA on the debt ratio

decrease when we control for the self-selection bias, they remain positive and significant (at the 1% and

5% levels, respectively). These results suggest that sponsors hire FA to take advantage of their banking

35
connections to increase leverage.

36
 Table 9: Regression analysis of the determinants of the debt ratio — Effect of the presence and the reputation of financial advisors.
The table presents results of the Tobit regression analysis of the effect of the presence and reputation of FA on the debt ratio and other project-and deal-specific
characteristics for a sample of PPPs projects over the period of 2001 to 2015 from ProjectWare database. Variables are defined in appendix A. The first column of
model (1) is the Tobit regression estimated with bootstrapped errors. The second and the third column of model (1) are results of the Heckman two-stage procedure.
Its second column is the first-stage selection equation estimated by probit regression using bootstrap to obtain standard errors, where the dependent variable is one
if at least one financial advisor to a sponsor is retained, or zero otherwise. Its third column is the second-stage equation, where the dependent variable is the debt
ratio and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one if, in the 5 years prior the deal, at least one of the
sponsors employed FA acting in his sole interest and zero otherwise. The results for the reputation (highly prestigious) of FA are presented in model (2). Notice
that, we identified some outliers. However, cook’s distance revealed that these outliers don’t have an influence on the results. The z-statistics are in parentheses.
The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

(1) Presence (2) Reputation (highly prestigious FA)

Tobit regression Heckman Heckman Tobit regression Heckman Heckman

First stage Second stage First stage Second stage

Intercept 0.66∗∗∗ −0.808∗ 0.582∗∗∗ 0.061∗∗∗ −2.767 0.436∗∗∗

(7.15) (−1.73) (5.52) (5.52) (−0.46) (6.43)
Scope −0.426∗∗∗ −0.694∗∗∗
(−2.75) (−2.56)

37
Dummy 2008-2010 Financial crisis 0.037 −0.583∗∗∗ −0.001 0.055 −0.427 0.050
(1.43) (−3.24) (−0.02) (0.75) (−1.19) (1.12)
Dummy Currency risk −0.034 0.057 −0.029
(−1.25) (0.27) (−1.07)
Capital expenditure −0.00001∗∗∗ 3.30e − 07 −0.0002 −0.00002 −0.0005 −0.00003∗
(2.62) (0.00) (1.78) (−1.61) (−0.55) (1.83)
Governance Index 0.001 0.005 0.001 0.0018∗∗ 0.017 0.0035∗∗∗
(1.37) (0.90) (1.57) (2.44) (0.25) (6.97)
Creditor Rights 0.027∗∗∗ 0.039 0.028∗∗∗ 0.023∗∗∗ 0.216 0.016
(4.47) (0.51) (3.19) (2.91) (1.41) (1.32)

FA to a sponsor 0.074∗∗∗ 0.076∗∗∗ 0.098∗ 0.043∗∗

(2.65) (2.61) (1.76) (1.96)
Marginal effect 0.054∗∗∗ 0.055∗∗∗ 0.065∗∗ 0.032∗∗
(2.68) (2.68) (2.08) (2.21)
Mills’ ratio 0.061 0.029
(1.00) (1.20)
5.6 The short-term reputation effect

To examine whether lenders consider recent past prestige to be more relevant, we compute market

shares over one year prior to the signing year. Indeed a financial advisor might have experience and

yet be considered as less prestigious based on his prior market share. Thus we expect that recent past

prestige of FA will have no effect on the loan spread, suggesting that lenders do not consider recent past

prestige to be relevant. However, recent past prestige should increase the debt ratio, and its marginal

effect should be higher than the effect of long past prestige (i.e., three years prior to the signing year).

This would suggest that the recent past prestige of FA would increase considerably project leverage.

Therefore, the recent position (one year prior to the signing year) of FA in “league tables” for global PF

loan market signals the higher degree of their banking connections. The table 10 presents the results.

Model (1) shows the results of the effect of recent past prestige of FA on loan spreads. The results of

the effect of recent past prestige of FA on the debt ratio is presented in model (2). To estimate the model

(1), we use the econometric models in sections 5.1 and 5.4.1. We use the econometric models in sections

5.5 to estimate the model (2). Results of the model (1) in the table 10 show that the reputation of FA

to a sponsor has no effect on the loan spreads. Although the coefficient is positive, it is not significant.

This result confirms that lenders do not consider recent prestige of FA when they form loan spreads.

However, the results of the model (2) show that the recent reputation of FA increases the debt ratio by

7% (significant at a 5% level), which is higher than the 3.2% marginal effect of long past prestige (see

table 9).

38
 Table 10: Regression analysis for the short-term reputation effect
The table presents results of the effect of FA reputation on loan spreads and on the debt ratio of the project using short-term reputation. To measure the effect of the
reputation of top financial advisors, we compute high-prestige dummies which take the value of one if the market share prior signing year (one year) of FA falls into
the top 25% quartile and zero otherwise. The model (1) presents the results for the loan spreads, where its first column is the OLS regression. The second column
is the first-stage selection equation estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if FA acting to
the sole interest of a sponsor are retained and if the advising firms and zero otherwise. The third column of the model (1) is is the second-stage equation, where
the dependent variable is the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes
the value of one if, in the 5 years prior the deal, at least one of the sponsors employed FA acting to his sole interest and zero otherwise. The model (2) presents the
results for the debt ratio, where its first column is the Tobit regression. Its second column is the first-stage selection equation estimated by probit regression using
bootstrapping to obtain standard errors, where the dependent variable is one if FA acting to the sole interest of a sponsor are retained and if the advising firms and
zero otherwise. The third column of model (2) is the second-stage equation, where the dependent variable is the debt ratio and the inverse Mills ratio adjusts for
the potential endogeneity. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

(1) Loan spreads (2) Debt ratio

OLS regression Heckman Heckman Tobit regression Heckman Heckman

First stage Second stage First stage Second stage

Intercept 428.881∗∗∗ −2.196∗∗∗ 454.019∗∗∗ 0.664∗∗∗ −2.196 0.573∗∗∗

(6.53) (−3.77) (8.03) (7.26) (−1.20) (5.79)

39
Scope −0.969∗∗∗ −0.969∗∗∗
(−3.13) (−2.67)
Dummy 2008-2010 Financial crisis −83.192∗∗ −1.359 −111.044∗∗ 0.056 −1.359∗∗∗ −0.007
(−2.50) (−0.51) (−2.46) (1.11) (−5.19) (−0.01)
Dummy Currency risk 26.472 −1.072 24.1876 −0.030∗ −1.072∗∗∗ −0.058
(1.27) (−1.42) (0.88) (−1.74) (−2.84) (−1.55)
Capital expenditure 0.010 0.0002 0.0106 −0.00002 0.0002∗ −0.00002∗
(1.54) (1.46) (1.05) (−1.88) (1.63) (−1.65)
Governance Index −2.988∗∗∗ 0.017∗∗ −2.926∗∗∗ 0.0012 0.017 0.002
(−3.83) (2.33) (−4.74) (1.34) (0.77) (1.61)
Creditor Rights 10.357 0.061 10.296 0.0267∗∗ 0.061 0.027∗∗
(1.62) (0.66) (1.49) (2.51) (0.55) (2.21)

Highly prestigious FA to a sponsor 84.038∗ 53.428 0.101∗∗ 0.106∗∗∗

(1.88) (0.55) (2.25) (2.59)
Marginal effect 0.067∗∗ 0.07∗∗
(2.47) (3.11)
Mills’ ratio 17.829 0.035
(0.28) (1.54)
6 Conclusion

There is a growing empirical literature on the signal communicated by the presence and reputation

of financial advisors (FA) in Mergers and Acquisitions deals and in the equity initial public offerings.

However, comparatively little is known about the signal communicated by the presence and reputation of

FA in credit markets. We fill this gap in the literature by examining whether the presence and reputation

of FA can act as a credible signaling device of the project’s quality. This empirical setting is particularly

rich because unlike corporate loans, project loans are linked to a single project, so it is possible to link

details of loans with specific project characteristics. We adapt the theoretical model of Inderst and

Ottaviani (2012) and Debbich (2015) to the context of the PF market to investigate the effect of FA.

Our model shows that the structure of fees (success fees) may damage the credibility of FA, as lenders

could worry that FA will try to sell them excessively risky projects. To test our theoretical predictions,

we use detailed information on 482 project finance (PF) loans granted to PPP projects during the period

from 2001 to 2015 obtained from Projectware. We find that the presence and the reputation of FA are

associated with higher costs of debt, confirming our theoretical predictions. However, the empirical

evidence suggests that the presence and the reputation of FA are associated with higher debt ratios.

This finding suggests that sponsors hire FA to take advantage of their banking connections to increase

leverage. Overall, success fees offers strong incentives to FA to focus more on providing high project

leverage than on reducing asymmetric information. Therefore, the presence and the reputation of FA

do not seem to be a credible signaling device of the quality of projects in the PF loan market. Our results

also provide useful new information for the larger syndicated loan market.

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44
 Appendix A

Table 11: Definitions of variables

Variable Description Source

Spread Spread over the reference rate (for example LIBOR, EURIBOR, etc.) ProjectWare
Dummy 2008-2010 financial crisis Dummy equal to one if the loan tranche is closed during the period 2008 and ProjectWare

2010 or zero otherwise.

Loan characteristics
tranche maturity Life of the tranche in years ProjectWare
tranche size Size of the loan tranche in US$. ProjectWare
Dummy refinancing loans Dummy equal to one if the loan is used to refinance a existing project loan ProjectWare

and zero otherwise

45
Dummy Development Bank loans Dummy equal to one if the loan is from a Development Bank and zero oth- ProjectWare

erwise.
Dummy Government loans Dummy equal to one if the loan is from the host Government and zero oth- ProjectWare

erwise.
Dummy Mezzanine loans Dummy is equal to one if the loan is a Mezzanine loan and zero otherwise ProjectWare
Dummy Guarantee loans Dummy is equal to one if the loan is guaranteed and 0 otherwise. Loans is ProjectWare

considered guranteed when ProjectWare listed “Guarantee loan”.

Dummy Revolver loans Dummy is equal to one if the loan is revolver loan and 0 otherwise. Loans is ProjectWare

considered as revolver loan when ProjectWare listed “Revolver loan”.

Dummy Currency risk Dummy is equal to one if the currency of loan is different from the currency ProjectWare

of the host government.

Syndicate size Number of lenders and Mandated lead arranger in the tranche’s syndicate ProjectWare

Project risk
Capital expenditure Size of the capital expenditure for each project in US$. ProjectWare
 Table 11: Definitions of variables

Variable Description Source

Financial advisors’ market shares The annual market share of each financial adisor is obtained from PF league ProjectWare

tables where the full amount of a tranche is allocated to each financial advi-

sor. The market share is calculated as the individual financial advisor amount

in percent of the total amount of all financial advisers in the league table.

when there is more than one financial advisor involved in one deal, we com-

pute the sum of market shares of all individual financial advisor. Based on

the financial closing date (the signing year), we compute one and three year

prior market shares.

High dummies prestige Dummy is equal one if the market share of financial advisers falls into the ProjectWare

top 25% quartile and zero otherwise.

Industry dummies

46
Social & Defences Convention centres, street lighting, urban regeneration,facilities and con- ProjectWare

tracts related to culture, defence, education, fire & rescue, govern-

ment,healthcare, housing, justice, sports & leisure and waste & recycling.
Oil & Gas Coal-to-liquids, downstream, drilling platforms & rigs, exploration, gas-to- ProjectWare

liquids,LNG (Liquefied Natural Gas), natural gas, offshore drilling, oil, oil

sands, petrochemicals,pipelines, refineries, re-gas, shipping, storage and up-

stream activities.
Water & Sewage Aquifers, desalination, flood defences, pipe networks, reservoirs & ProjectWare

dams,sewage treatment, storage, waste water and water treatment facilities.

Telecoms Base stations, broadcasting, operators and networks for 3G, 4G, broad- ProjectWare

band,cable, fibre-optic, fixed-line, GPRS, GPS, GSM, satellite, VoIP, WiFi and

WiMax.
 Table 11: Definitions of variables

Variable Description Source

Renewables Biofuels, biomass, geothermal, hydrogen, offshore wind, onshore ProjectWare

wind,photovoltaic solar, small hydro (<100MW), thermal solar, tidal,

waste-to-energy, and wave power.

Mining & Metals Extraction, facilities and operations for the mining, smelting and processing ProjectWare

of aluminium, cement, copper, coal, diamonds, gold, iron, lead, nickel, steel,

uranium, zinc andother precious metals.

Transport Airports, bridges, canals, car parks, heavy & light rail, subways, ports, termi- ProjectWare

nals,roads, rolling stock, service stations, tolling and tunnels

Power Transmission, distribution and generation from coal-fired, dual-fuel, gas- ProjectWare

fired, oil-fired,IWPP (Independent Water and Power Production), large hydro

(>100MW), and nuclearsources

47
Dummy professional servises firms The variable takes one if financial advisors to sponsor are retained and if all ProjectWare

advising firms are professional services firms, and zero otherwise

Governance index
Voice and Accountability Reflects perceptions of the extent to which a country’s citizens are able to Kaufmann et al. (2009)

participate in selecting their government, as well as freedom of expression,

freedom of association, and a free media.

Political Stability and Absence of Violence/Terrorism Political Stability and Absence of Violence/Terrorism measures perceptions Kaufmann et al. (2009)

of the likelihood of political instability and/or politically-motivated violence,

including terrorism.
Government Effectiveness Reflects perceptions of the quality of public services, the quality of the civil Kaufmann et al. (2009)

service and the degree of its independence from political pressures, the qual-

ity of policy formulation and implementation, and the credibility of the gov-

ernment’s commitment to such policies.

 Table 11: Definitions of variables

Variable Description Source

Regulatory Quality Reflects perceptions of the ability of the government to formulate and imple- Kaufmann et al. (2009)

ment sound policies and regulations that permit and promote private sector

development.
Rule of Law Reflects perceptions of the extent to which agents have confidence in and Kaufmann et al. (2009)

abide by the rules of society, and in particular the quality of contract enforce-

ment, property rights, the police, and the courts, as well as the likelihood of

crime and violence.

Control of Corruption Reflects perceptions of the extent to which public power is exercised for pri- Kaufmann et al. (2009)

vate gain, including both petty and grand forms of corruption, as well as

“capture” of the state by elites and private interests.

Legal risk

48
Creditor Rights Reflects different legal protections of lenders. The index is formed by adding La Porta et al. (1998)

1 when (1) the country imposes restrictions, such as creditors’ consent or

minimum dividends to file for reorganization; (2) secured creditors are able

to gain possession of their security once the reorganization petition has been

approved (no automatic stay); (3) secured creditors are ranked first in the

distribution of the proceeds that result from the disposition of the assets of

a bankrupt firm; and (4) the debtor does not retain the administration of

its property pending the resolution of the reorganization. The index ranges

from zero to four

 Table 12: Regression analysis of financial advisor effect in PF loan market

The table presents results of the cross-sectional OLS regression and the Heckman two-stage procedure of the effect of the reputation and the presence of FA on loan
spreads and other project-and deal-specific characteristics for a sample of PPPs projects over the period of 2001 to 2015 from ProjectWare database. Variable are
defined in appendix A. Models (1) to (3) present results of the effect of reputation of FA (Highly prestigious FA) on loan spread when they act in the sole interest of
a sponsor. The model (1) is the selection model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one
if the retained FA acting to the sole interest of a sponsor is highly prestigious and zero otherwise. The model (2) is the second-stage equation, where the dependent
variable is the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one
if, in the 5 years prior the deal, at least one of the sponsors employed financial advisors acting to his sole interest and zero otherwise. Model (3) presents the results
of the OLS regression estimated with White-corrected standard errors. We identify some outlier. However, cook’s distance reveals that these outliers don’t have an
influence on the results. Models (4) to (6) present results when the retained FA to sponsor belong to top-10 (ProjectWare’ league tables). The model (4) is the
selection model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the
sole interest of a sponsor belongs to top-10 and zero otherwise. The models (7) to (9) test for the presence of FA in deals. The model (7) is the first-stage selection
equation estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if FA acting to the sole interest of a
sponsor are retained and zero otherwise. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

Intercept −2.767 410.381∗∗∗ 413.319∗∗∗ −3.014∗∗∗ 449.976∗∗∗ 425.175∗∗∗ −0.807∗ 440.916∗∗∗ 434.206∗∗∗
(−0.37) (5.13) (6.42) (−4.63) (4.35) (6.56) (−1.84) (5.37) (6.66)

49
Scope −0.694∗∗∗ −0.689∗∗∗ −0.426∗∗∗
(−2.40) (−4.63) (−2.70)
Dummy 2008-2010 Financial crisis −0.427 −77.172∗∗ −86.661∗∗∗ −0.943∗∗∗ −83.723 −84.183∗∗∗ −0.582∗∗∗ −101.865∗∗∗ −95.754∗∗∗
(−0.26) (−2.14) (−2.64) (−3.59) (−1.10) (−2.55) (−3.45) (−2.73) (−2.87)
Loan and characteristics
ln(tranche maturity) 5.152 2.553 4.443 2.709 3.082 2.545
(0.50) (0.23) (0.43) (0.24) (0.31) (0.23)
ln(tranche size) −0.357 0.657 0.540 0.636 −0.071 −0.055
(−0.07) (0.10) (0.09) (−0.10) (−0.01) (−0.01)
Dummy refinancing loans 16.030 3.332 2.270 −2.837 −11.617 −11.919
(0.51) (0.13) (0.07) (−0.11) (-0.59) (−0.46)
Dummy Development Bank loans −53.941 −53.990 −54.303 −56.037 −51.562 −52.837
(−1.31) (−1.53) (−1.26) (−1.56) (−1.32) (−1.43)
Dummy Government loans 53.772 34.879 36.061 33.664 21.052 21.935
(1.16) (0.92) (0.81) (0.90) (0.64) (0.58)
Dummy Mezzanine loans 109.017 122.201 113.795 119.237 117.797 119.499
(1.00) (1.16) (0.97) (1.14) (1.01) (1.16)
Dummy Guarantee loans −72.194∗∗ −64.307∗∗∗ −66.563∗∗∗ −59.325∗∗∗ −57.275∗∗∗ −55.391∗∗
(−4.52) (−2.67) (−2.67) (−2.58) (−2.94) (−2.32)
Dummy Revolver loans −56.687 −60.105∗∗ −63.880∗∗∗ −66.444∗∗∗ −66.153∗∗ −65.706∗∗
 Table 12: Regression analysis of financial advisor effect in PF loan market

The table presents results of the cross-sectional OLS regression and the Heckman two-stage procedure of the effect of the reputation and the presence of FA on loan
spreads and other project-and deal-specific characteristics for a sample of PPPs projects over the period of 2001 to 2015 from ProjectWare database. Variable are
defined in appendix A. Models (1) to (3) present results of the effect of reputation of FA (Highly prestigious FA) on loan spread when they act in the sole interest of
a sponsor. The model (1) is the selection model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one
if the retained FA acting to the sole interest of a sponsor is highly prestigious and zero otherwise. The model (2) is the second-stage equation, where the dependent
variable is the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one
if, in the 5 years prior the deal, at least one of the sponsors employed financial advisors acting to his sole interest and zero otherwise. Model (3) presents the results
of the OLS regression estimated with White-corrected standard errors. We identify some outlier. However, cook’s distance reveals that these outliers don’t have an
influence on the results. Models (4) to (6) present results when the retained FA to sponsor belong to top-10 (ProjectWare’ league tables). The model (4) is the
selection model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the
sole interest of a sponsor belongs to top-10 and zero otherwise. The models (7) to (9) test for the presence of FA in deals. The model (7) is the first-stage selection
equation estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if FA acting to the sole interest of a
sponsor are retained and zero otherwise. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
(−1.45) (−2.33) (−2.47) (−2.67) (−2.14) (−2.33)
Dummy Currency risk −4.549∗∗∗ 65.392∗∗ 29.367 −0.727∗ 35.471 24.988 0.056 18.361 19.693
(11.14) (2.03) ( 1.44) ((−1.85) (0.94) ( 1.21) (0.24) (0.80) (0.93)

50
Syndicate size −1.309 −2.570 −2.517 −2.891 −3.127 −3.259
(−0.45) (−0.83) (−0.71) (−0.91) (−0.81) (−0.99)

Project risk
Capital expenditure −0.0005 0.0147∗ 0.011∗ 0.0001∗∗ 0.009 0.0105∗ 3.30e − 07 0.0125∗∗ 0.012∗∗
(−0.34) (1.73) (1.71) (2.02) (1.41) (1.67) (0.01) (2.13) (1.96)

Institutional risk

Governance Index 0.016 −2.9805∗∗∗ −2.780∗∗∗ 0.027∗ −3.371∗∗∗ −2.952∗∗∗ 0.005 −3.043∗∗∗ −2.951∗∗∗
(0.20) (−3.96) (−3.64) (1.79) (−4.75) (−3.88) (0.89) (−3.47) (−3.96)
Creditor Rights 0.216 0.734 8.740 0.123 9.382 10.347 0.039 10.539 10.715∗
(1.33) (−0.08) (1.41) (1.16) (1.55) (1.62) (0.42) (1.49) (1.67)

Highly prestigious FA to a sponsor 569.342∗∗∗ 106.757∗

(2.40) (1.72)
FA to a sponsor beloging to top-10 169.821 48.180∗
(1.23) (1.69)
Presence of FA to a sponsor 95.797 43.081∗
(0.90) (1.85)
 Table 12: Regression analysis of financial advisor effect in PF loan market

The table presents results of the cross-sectional OLS regression and the Heckman two-stage procedure of the effect of the reputation and the presence of FA on loan
spreads and other project-and deal-specific characteristics for a sample of PPPs projects over the period of 2001 to 2015 from ProjectWare database. Variable are
defined in appendix A. Models (1) to (3) present results of the effect of reputation of FA (Highly prestigious FA) on loan spread when they act in the sole interest of
a sponsor. The model (1) is the selection model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one
if the retained FA acting to the sole interest of a sponsor is highly prestigious and zero otherwise. The model (2) is the second-stage equation, where the dependent
variable is the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one
if, in the 5 years prior the deal, at least one of the sponsors employed financial advisors acting to his sole interest and zero otherwise. Model (3) presents the results
of the OLS regression estimated with White-corrected standard errors. We identify some outlier. However, cook’s distance reveals that these outliers don’t have an
influence on the results. Models (4) to (6) present results when the retained FA to sponsor belong to top-10 (ProjectWare’ league tables). The model (4) is the
selection model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the
sole interest of a sponsor belongs to top-10 and zero otherwise. The models (7) to (9) test for the presence of FA in deals. The model (7) is the first-stage selection
equation estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if FA acting to the sole interest of a
sponsor are retained and zero otherwise. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
∗
Mills’ ratio −247.146 −70.790 −42.935
(−1.90) (−0.94) (−0.67)
Industrie dummies no yes yes no yes yes no yes yes

51
Year dummies no yes yes no yes yes no yes yes
Sample size 325 325 325 325 325 325 325 325 325
Adjusted R2 0.1499 0.1379 0.1412
 Table 13: Regression analysis of financial advisor in PF loan market –Only professional services firms versus mixed types in deals

The table presents results of the cross-sectional OLS regression and the Heckman two-stage procedure of the effect of the reputation and the presence of FA on loan
spreads and other project-and deal-specific characteristics for a sample of PPP projects over the period of 2001 to 2015 from ProjectWare database. Variable are
definied in appendix A. Models (1) to (3) present results of the effect of reputation of FA (Highly prestigious FA) on loan spreads. The model (1) is the selection
model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest
of a sponsor are highly prestigious and professional services firms, and zero otherwise. The model (2) is the second-stage equation, where the dependent variable is
the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one if, in the 5
years prior the deal, at least one of the sponsors employed financial advisors acting to his sole interest and zero otherwise. Model (3) presents the results of the OLS
regression estimated with White-corrected standard errors. We identify some outlier. However, cook’s distance reveals that these outliers don’t have an influence
on the results. The models (4) to (6) test for the presence of FA in deals. The model (6) is the first-stage selection equation estimated by probit regression using
bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest of a sponsor are professional services firms
and zero otherwise. Models (7) to (9) present results when the retained FA to sponsor belong to top-10 (ProjectWare’ league tables). The model (7) is the selection
model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest
of a sponsor belongs to top-10 and are professional services firms and zero otherwise. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1%
levels, respectively.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

Intercept −2.7670 410.381∗∗∗ 413.320∗∗∗ −3.305 436.380∗∗∗ 423.582∗∗∗ −3.463 437.497∗∗∗ 421.536∗∗∗
(−0.43) (5.03) (6.42) (−0.52) (5.32) (6.65) (-0.33) (6.20) (6.52)

52
Scope −0.694∗∗∗ −0.710∗∗∗ −0.940∗∗∗
(−2.50) (−2.76) (−2.79)
Dummy 2008-2010 Financial crisis −0.427 −77.172∗ −86.661∗∗∗ −0.299 −82.512 −85.225∗∗∗ −0.327 −88.704∗ −86.772∗∗∗
(−0.40) (−1.83) (−2.64) (−1.43) (−1.59) (−2.60) (−0.25) (−1.90) (−2.63)
Microeconomic loan and characteristics
ln(tranche maturity) 5.152 2.553 2.832 2.273 3.547 2.135
(0.39) (0.23) (0.15) (0.20) (0.23) (0.19)
ln(tranche size) −0.357 0.657 −0.499 −0.362 −0.572 0.281
(−0.08) (0.10) (−0.07) (0.06) (−0.07) (0.05)
Dummy refinancing loans 16.030 3.331 10.342 1.588 10.652 2.507
(0.76) (0.13) (0.47) (0.06) (0.36) (0.10)
Dummy Development Bank loans −53.941 −53.991 −50.085 −53.859 −53.225 −53.441
(−0.93) (−1.53) (−1.06) (−1.50) (−1.56) (−1.49)
Dummy Government loans 53.772∗ 34.879 41.618 28.442 40.362 29.994
(1.72) (0.92) (1.30) (0.75) (1.25) (0.79)
Dummy Mezzanine loans 109.017 122.201 110.763 117.895 109.517 120.062
(0.97) (1.16) (0.90) (1.13) (1.31) (1.14)
Dummy Guarantee loans −72.194∗∗ −64.307∗∗∗ −65.342∗∗ −59.661∗∗ −65.521∗∗∗ −60.544∗∗∗
(−2.29) (−2.67) (−2.30) (−2.59) (−2.82) (−2.60)
 Table 13: Regression analysis of financial advisor in PF loan market –Only professional services firms versus mixed types in deals

The table presents results of the cross-sectional OLS regression and the Heckman two-stage procedure of the effect of the reputation and the presence of FA on loan
spreads and other project-and deal-specific characteristics for a sample of PPP projects over the period of 2001 to 2015 from ProjectWare database. Variable are
definied in appendix A. Models (1) to (3) present results of the effect of reputation of FA (Highly prestigious FA) on loan spreads. The model (1) is the selection
model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest
of a sponsor are highly prestigious and professional services firms, and zero otherwise. The model (2) is the second-stage equation, where the dependent variable is
the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one if, in the 5
years prior the deal, at least one of the sponsors employed financial advisors acting to his sole interest and zero otherwise. Model (3) presents the results of the OLS
regression estimated with White-corrected standard errors. We identify some outlier. However, cook’s distance reveals that these outliers don’t have an influence
on the results. The models (4) to (6) test for the presence of FA in deals. The model (6) is the first-stage selection equation estimated by probit regression using
bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest of a sponsor are professional services firms
and zero otherwise. Models (7) to (9) present results when the retained FA to sponsor belong to top-10 (ProjectWare’ league tables). The model (7) is the selection
model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest
of a sponsor belongs to top-10 and are professional services firms and zero otherwise. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1%
levels, respectively.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
∗∗ ∗∗ ∗∗ ∗
Dummy Revolver loans −56.687 −60.105 −59.034 −63.571 −58.595 −61.641∗∗
(−2.08) (−2.33) (−1.23) (−2.40) (−1.94) (−2.37)

53
Dummy Currency risk −4.549∗∗∗ 65.392∗ 29.367 −4.716∗∗∗ 50.62 24.631 −4.706∗∗∗ 46.598∗ 27.070
(−17.82) (1.76) ( 1.44) (−19.25) (1.62) (1.20) (−10.40) (−1.66) (1.33)
Syndicate size −1.310 −2.570 −1.934 −2.789 −1.917 −2.777
(−0.48) (−0.83) (−0.54) (−0.87) (−0.61) (−0.88)

Project risk
Capital expenditure −0.0005 0.0147∗∗∗ 0.0108∗ −0.00069∗ 0.0150∗∗ 0.0118∗ −0.007 0.0141∗∗ 0.0116∗
(−0.53) (2.96) (1.71) (−1.88) (2.00) (1.85) (−0.62) (1.99) (1.82)

Institutional risk

Governance Index 0.0167 −2.981∗∗∗ −2.780∗∗∗ 0.0277 −3.195∗∗∗ −2.836∗∗∗ 0.027 −3.097∗∗∗ −2.840∗∗∗
(0.22) (−4.06) (−3.64) (0.40) (−4.68) (−3.84) (0.24) (−3.84) (−3.78)
Creditor Rights 0.216 0.734 8.741 0.1571 5.213 9.757 0.227 5.272 9.260
(1.42) (0.08) (1.41) (0.99) (0.76) (1.55) (1.21) (0.76) (1.49)

Highly prestigious FA only

to a sponsor*Consultancy Firms 569.342∗∗∗ 106.756∗
(2.55) (1.72)
Presence of FA only
 Table 13: Regression analysis of financial advisor in PF loan market –Only professional services firms versus mixed types in deals

The table presents results of the cross-sectional OLS regression and the Heckman two-stage procedure of the effect of the reputation and the presence of FA on loan
spreads and other project-and deal-specific characteristics for a sample of PPP projects over the period of 2001 to 2015 from ProjectWare database. Variable are
definied in appendix A. Models (1) to (3) present results of the effect of reputation of FA (Highly prestigious FA) on loan spreads. The model (1) is the selection
model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest
of a sponsor are highly prestigious and professional services firms, and zero otherwise. The model (2) is the second-stage equation, where the dependent variable is
the loan spreads over various reference rates and the inverse Mills ratio adjusts for the potential endogeneity. The scope variable takes the value of one if, in the 5
years prior the deal, at least one of the sponsors employed financial advisors acting to his sole interest and zero otherwise. Model (3) presents the results of the OLS
regression estimated with White-corrected standard errors. We identify some outlier. However, cook’s distance reveals that these outliers don’t have an influence
on the results. The models (4) to (6) test for the presence of FA in deals. The model (6) is the first-stage selection equation estimated by probit regression using
bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest of a sponsor are professional services firms
and zero otherwise. Models (7) to (9) present results when the retained FA to sponsor belong to top-10 (ProjectWare’ league tables). The model (7) is the selection
model estimated by probit regression using bootstrapping to obtain standard errors, where the dependent variable is one if the retained FA acting to the sole interest
of a sponsor belongs to top-10 and are professional services firms and zero otherwise. The symbols ∗, ∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1%
levels, respectively.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)
∗∗
to a sponsor*Consultancy Firms 305.695 46.973
(2.32) (1.01)

54
Beloging to top-10
to a sponsor*Consultancy Firms 296.781 72.806
(1.56) (1.33)
Mills’ ratio −247.146∗∗ −146.891∗∗ −129.415
(−2.11) (−2.12) (−1.50)
Industrie dummies no yes yes no yes yes no yes yes
Year dummies no yes yes no yes yes no yes yes
Sample size 325 325 325 325 325 325325 325 325
Adjusted R2 0.1498 0.1340 0.1397
 Table 14: Regression analysis of determinants of the debt ratio–Effect of the presence and the reputation of financial advisors

Model (1) to (3) test the effect of the presence of FA acting to the sole interest of a sponsor. We identify some outlier. However, cook’s distance reveals that these
outliers don’t have an influence on the results. Model (1) is the selection model and model (2) the second-stage equation of Heckman. Model (3) is the normal Tobit
estimation with bootstrapped errors. Models (4) to (6) test the effect of reputations of highly prestigious FA acting in the sole interest of a sponsor. The symbols ∗,
∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

Variable (1) (2) (3) (4) (5) (6)

Intercept −0.808∗ 0.582∗∗∗ 0.666∗∗∗ −2.767 0.436∗∗∗ 0.609∗∗∗

(−1.73) (5.52) (7.15) (−0.46) (6.43) (5.52)

Scope −0.426∗∗∗ −0.694∗∗∗

(−2.75) (−2.56)
Dummy 2008-2010 Financial crisis −0.583∗∗∗ −0.001 0.037 −0.427 0.050 0.055
(−3.24) (−0.02) (0.48) (−1.19) (1.12) (0.75)
Microeconomic loan and characteristics
Dummy refinancing loan 0.332 0.332 0.312 0.351
(1.60) (1.07) (0.93) (1.13)
Dummy Development Bank loans −0.061 −0.054 0.040 −0.066
(−0.73) (−0.98) (1.22) (−0.73)

55
Dummy Government loans −0.0021 −0.005 0.024 0.002
(−0.03) (−0.10) (0.51) (0.02)
Dummy Mezzanine loans −0.087 −0.094 −0.018 −0.079
(−0.95) (−0.86) (−0.18) (−0.72)
Dummy Guarantee loans 0.101 0.098 0.071 0.099
(1.51) (0.54) (0.93) (0.41)
Dummy Revolver loans −0.032 −0.034 −0.052 −0.038
(−0.63) (−0.52) (−1.53) (−0.53)
Dummy Currency risk 0.057 −0.029 −0.034 θa θa θa
(0.27) (−1.07) ( −1.25)
Syndicate size 0.003 0.003 0.004 0.003
(0.88) (1.43) (0.86) (0.80)

Project risk
Capital expenditure 3.30e − 07−0.00002 −0.00001∗∗∗ −0.0005 −0.00003∗ −0.00002
(0.00) (−1.78) (−2.62) (−0.55) (−1.83) (−1.61)

Institutional risk

Governance Index 0.005 0.001 0.001 0.017 0.0035∗∗∗ 0.0018∗∗

 Table 14: Regression analysis of determinants of the debt ratio–Effect of the presence and the reputation of financial advisors

Model (1) to (3) test the effect of the presence of FA acting to the sole interest of a sponsor. We identify some outlier. However, cook’s distance reveals that these
outliers don’t have an influence on the results. Model (1) is the selection model and model (2) the second-stage equation of Heckman. Model (3) is the normal Tobit
estimation with bootstrapped errors. Models (4) to (6) test the effect of reputations of highly prestigious FA acting in the sole interest of a sponsor. The symbols ∗,
∗∗ and ∗ ∗ ∗ denote statistical significance at 10%, 5% and 1% levels, respectively.

Variable (1) (2) (3) (4) (5) (6)

(0.90) (1.57) (1.37) (0.25) (6.97) (2.44)
Creditor Rights 0.039 0.028∗∗∗ 0.027∗∗∗ 0.216 0.0162 0.023∗∗∗
(0.51) (3.19) (4.47) (1.41) (1.32) (2.91)

Presence of FA only
to a sponsor 0.076∗∗∗ 0.074∗∗∗
( 2.61) 2.65
Mills’ ratio 0.061
(1.00)
Marginal effect 0.055∗∗∗ 0.054∗∗∗
( 2.78) (2.68)

56
Highly prestigious FA only
to a sponsor 0.043∗∗ 0.098∗
(1.96) (1.76)
Mills’ ratio 0.029
(1.20)
Marginal effect 0.032∗∗ 0.065∗∗
(2.21) (2.08)
Industrie dummies no yes yes no yes yes
Year dummies no yes yes no yes yes
Sample size 325 325 325 325 325 325
 Percentage of loan tranches each year
0.12
0.10
0.08
Density
0.06
0.04
0.02
0.00

2002 2004 2006 2008 2010 2012 2014

Year

Figure 3: Percentage of loan tranches each year

57
 Table 15: Descriptive statistics for Project Finance Loans Sample, 2001-2015 (continued)

Loan tranches of PPP projects with spread, maturity of debt and tranche size available.
Regional distribution of tranche size (US$m). In the parenthesis, we have the number of loan tranches with FA.
Mean Median Standard Deviation Minimum Maximum Total Value Nb. of tranches
Asia Pacific 174.91 33.61 418.73 0.44 3,085.29 27,110.47 154 (89)
South Korea 57.71 21.71 99.91 0.53 679.15 5,424.76 94 (61)
Australia 536.10 342.2 762.17 7,18 3,085.29 14,498.89 27 (14)
Japan 49.32 30.10 57.06 0.44 210.71 838.41 17 (5)
China 1,999.98 1,999.98 1,999.98 1,999.98 1,999.98 1 (1)
Hong Kong 35.89 35.89 35.89 35.89 35.89 1 (0)
India 328.32 86.81 457.17 60 1,312.91 2,298.27 7 (4)
Indonesia 573.04 573.04 573.04 573.04 573.04 1 (0)
Philippines 32.5 32.5 12.02 24 41 65 2 (0)
Singapore 1,072 1,072 1,072 1,072 1,072 1 (1)
Taiwan 134.38 134.38 134.38 134.38 134.38 1 (0)
Vietnam 56.62 42.95 33.65 31.95 94.95 169.85 3 (3)

58
Latin America 194.36 74.42 455.70 3.08 2,838.5 7,580.14 39 (27)
Mexico 344.63 209 643.87 15 2,838.5 6,103.28 18 (13)
Chile 34.20 32.05 28.53 3.08 83.46 341.95 10 (7)
Brazil 95.43 49.50 87.63 27.45 240 858.88 9 (6)
Colombia 88.02 88.02 33.96 64 112.03 176.03 2 (1)
North America 455.80 219 803.63 19.5 3,247.18 6,837.04 15 (11)
United States 684.38 400 1,146.63 19.50 3,247.18 4,790.68 7 (4)
Canada 292.84 239.20 161.48 164.96 528 1,171.36 4 (3)
Jamaica 25 25 7.07 20 30 50 2 (2)
Puerto Rico 412.5 412.5 477.30 75 750 825 2 (2)
 Table 16: Descriptive statistics for Project Finance Loans Sample, 2001-2015 (continued)

Loan tranches of PPP projects with spread, maturity of debt and tranche size available.
Regional distribution of tranche size (US$m). In the parenthesis, we have the number of loan tranches with FA.
Mean Median Standard Deviation Minimum Maximum Total Value Nb. of tranches
Europe 183.07 69.52 492.50 0.39 4,956 46,499.59 254 (184)
United Kingdom 133.57 59.35 266.89 0.39 1,816.54 18,566.09 139 (109)
Spain 128.96 69.54 168.29 1 696.39 4,126.78 32 (15)
Portugal 136.31 63.6 239.25 4.01 1,109.88 2,998.73 22 (15)
Belgium 122.11 132 79.30 38.33 196 366.33 3 (1)
Bulgaria 42.81 42.81 34.59 18.35 67.27 85.62 2 (0)
Cyprus 672 672 672 672 672 1 (1)
France 185.13 115.73 248.16 11.3 824 1,851.28 10 (6)
Germany 59.90 83.85 47.81 4.85 91.01 179.71 3 (1)
Greece 12.48 12.48 12.48 12.48 12.48 1 (1)
Hungary 815.40 872.16 558.15 231.04 1,343.01 2446.21 3 (3)
Irland 89.05 45.67 114.35 3.76 370.68 1,424.85 16 (16)

59
Italy 91.87 91.87 10.13 84.7 99.03 183.73 2 (1)
Netherlands 150.51 106.85 95.86 12.3 264 1,354.62 9 (9)
Norway 128.26 155.57 77.06 41.26 187.94 384.77 3 (3)
Poland 562.51 562.51 562.51 562.51 562.51 1 (1)
Slovakia 202.57 202.57 117.42 119.54 285.6 405.14 2 (2)
Turkey 2,142.54 306.29 2,568.78 188.1 4,956 10,712.68 5 (0)
MENA 278.91 155.45 277.46 9 800 3,346.97 12 (9)
United Arab Emirates 418.67 410 373.08 50 796 1,256 3 (3)
Saudi Arabia 355.77 170 386.43 97.3 800 1,067.30 3 (1)
Bahrain 94.86 93.9 45.56 49.8 140.9 284.6 3 (3)
Egypt 9 9 9 9 9 1 (1)
Kuwait 368.07 368.07 368.07 368.07 368.07 1 (1)
Tunisia 362 362 362 362 362 1 (0)
Sub-Saharan Africa 54.57 40 27.68 25 100 382 7 (7)
Kenya 45 37.5 24.15 25 80 180 4 (4)
South Africa 67.33 65 31.56 37 100 202 3 (3)
 Table 17: Descriptive statistics for Project Finance Loans Sample, 2001-2015 (continued)

Loan tranches of PPP projects with spread, maturity of debt and tranche size available.
Industrial distribution of tranche size (US$m). In the parenthesis, we have the number of loan tranches with FA.
Mean Median Standard Deviation Minimum Maximum Total Value Nb. of tranches
Social & Defense 98.09 35.03 226.05 0.39 2,685.97 20,599.6 210 (141)
Transport 323.81 122.30 679.19 3.51 4,956 53,427.98 165 (112)
Water 183.64 40.06 494.87 1.57 3,085.29 8,998.36 49 (37)
Power 123.25 46.23 146.71 15 604 2,464.99 20 (16)
Renewables 132.83 80.30 166.50 16.23 699.56 2,125.2 16 (10)
Telecoms 64.23 65 44.06 4.85 147.10 578.04 9 (5)
Oil & Gas 375.78 117.41 627.04 7.18 1,999.98 3,382.04 9 (2)
Mining 45 37.50 24.15 25 80 180 4 (4)
Total 178.85 56.49 370.11 0.39 3,085.29 58,486.28 482 (327)

60