The Flip Side of Financial Synergies: Coinsurance versus Risk Contamination

Marco Ottaviani, Andrew Winton and Albert Banal-Estañol
Authors registered in the RePEc Author Service: Albert Banal-Estanol

No 484, Working Papers from Barcelona School of Economics

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 (associated to the contagious default of a well-performing project that is dragged down by a poorly-performing project) 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 existing evidence on conglomerate mergers, spin-offs, project finance, and securitization.

Keywords: mergers; spin-offs; default costs; conglomeration; project finance; risk contamination; coinsurance (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2015-09
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Citations: View citations in EconPapers (21)

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Related works:
Journal Article: The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination (2013)
Working Paper: The Flip Side of Financial Synergies:Coinsurance versus Risk Contamination (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:484

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