The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination

Albert Banal-Estanol, Marco Ottaviani and Andrew Winton

The Review of Financial Studies, 2013, vol. 26, issue 12, 3142-3181

Abstract: This paper characterizes when joint financing of two projects through debt increases expected default costs, contrary to conventional wisdom. Separate financing dominates joint financing when risk-contamination losses--that are associated with the contagious default of a well-performing project that is dragged down by the other project's poor performance--outweigh standard coinsurance gains. Separate financing becomes more attractive than joint financing when the fraction of returns lost under default increases and when projects have lower mean returns, higher variability, more positive correlation, and more negative skewness. These predictions are broadly consistent with evidence on conglomerate mergers, spinoffs, project finance, and securitization. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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Working Paper: The Flip Side of Financial Synergies: Coinsurance versus Risk Contamination (2015)
Working Paper: The Flip Side of Financial Synergies:Coinsurance versus Risk Contamination (2013)
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