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The Flip Side of Financial Synergies: Coinsurance versus Risk Contamination

Author

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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 (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.

Suggested Citation

  • Albert Banal-Estañol & Marco Ottaviani & Andrew Winton, 2013. "The Flip Side of Financial Synergies: Coinsurance versus Risk Contamination," Working Papers 484, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:484
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Giovanna Nicodano & Luca Regis, 2014. "Complex organizations, tax policy and financial stability," Carlo Alberto Notebooks 359, Collegio Carlo Alberto, revised 2015.
    2. Giovanna Nicodano & Luca Regis, 2015. "Ownership, Taxes and Default," Working Papers 7/2015, IMT Institute for Advanced Studies Lucca, revised Jul 2015.
    3. Mikel Bedayo, 2016. "Creating associations to substitute banks’direct credit. Evidence from Belgium," Working Paper Research 315, National Bank of Belgium.
    4. Mikel Bedayo, 2017. "Creating associations as a substitute for direct bank credit. Evidence from Belgium," Working Papers 1704, Banco de España;Working Papers Homepage.
    5. Michela Altieri & Giovanna Nicodano, 2016. "The Apparent Diversification Discount," Carlo Alberto Notebooks 465, Collegio Carlo Alberto.
    6. repec:eee:jbfina:v:88:y:2018:i:c:p:208-224 is not listed on IDEAS

    More about this item

    Keywords

    default costs; conglomeration; Mergers; spin-offs; project finance; risk contamination; coinsurance;

    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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