Project financing focuses security and liability provisions on the specific investment project. It represents an alternative to financing new investment through equity, retained earnings or debt connected to the financial position of the parent firm. The parent firm no matter what the financing arrangement still manages the investment project but with project financing, outside investors directly assume some of the project risk. This paper examines the factors that favour project financing. The analysis focuses on the advantages of risk-reduction for the parent firm from project financing versus incentives for managerial effort. It is shown with other factors equal that project financing is favoured when fixed capital costs are high relative to other costs or when the return to the project is less sensitive to unobservable levels of managerial effort.