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The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination

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  • Albert Banal-Estañol
  • Marco Ottaviani
  • Andrew Winton

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.

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  • Albert Banal-Estañol & Marco Ottaviani & Andrew Winton, 2013. "The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination," Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3142-3181.
  • Handle: RePEc:oup:rfinst:v:26:y:2013:i:12:p:3142-3181
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    File URL: http://hdl.handle.net/10.1093/rfs/hht049
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    4. Alexander Guembel & Oren Sussman, 2020. "The Pecking Order of Segmentation and Liquidity-Injection Policies in a Model of Contagious Crises," Review of Economic Studies, Oxford University Press, vol. 87(3), pages 1296-1330.
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    6. Luciano, Elisa & Wihlborg, Clas, 2018. "Financial synergies and systemic risk in the organization of bank affiliates," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 208-224.
    7. Rosa Ferrentino & Luca Vota, 2023. "The optimal financing of a conglomerate firm with hidden information and costly state verification," Annals of Finance, Springer, vol. 19(1), pages 23-62, March.
    8. Luciano, Elisa & Wihlborg, Clas, 2023. "Why are BHCs organized as parent-subsidiaries? How do they grow in value?," Journal of Financial Stability, Elsevier, vol. 67(C).
    9. Michela Altieri & Giovanna Nicodano, 2020. "Survival and Pricing Puzzles," Carlo Alberto Notebooks 604, Collegio Carlo Alberto.
    10. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2023. "Fragility of Secured Credit Chains," Diskussionsschriften dp2304, Universitaet Bern, Departement Volkswirtschaft.
    11. Jieying Hong & Rui Zhang, 2023. "Manager‐specific shocks, financial constraints and conglomerate merger," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 46-59, February.
    12. Mikel Bedayo, 2017. "Creating associations as a substitute for direct bank credit. Evidence from Belgium," Working Papers 1704, Banco de España.
    13. Marco Buso & Luciano Greco, 2021. "The Optimality of Public-Private Partnerships under Financial and Fiscal Constraints," "Marco Fanno" Working Papers 0276, Dipartimento di Scienze Economiche "Marco Fanno".
    14. Michela Altieri & Giovanna Nicodano, 2016. "The Apparent Diversification Discount," Carlo Alberto Notebooks 465, Collegio Carlo Alberto.
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    16. Dam, Kaniṣka & Roy Chowdhury, Prabal, 2021. "Monitoring and incentives under multiple-bank lending: The role of collusive threats," Journal of Economic Theory, Elsevier, vol. 197(C).

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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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