Banal-Estañol, Albert, Ottaviani, Marco and Winton, Andrew (2013) “The Flip Side of Financial Synergies: Coinsurance versus Risk Contamination.” Review of Financial Studies, 26(12), 3142-3181.
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.
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Albert Banal is Associate Professor of Finance at the Department of Economics and Business. He is Academic Director of the Master of Science in Finance and Banking and he teaches the Corporate Finance course at the UPF Barcelona School of Management.
Department of Economics and Business
Pompeu Fabra University UPF Barcelona School of Management
University of Minnesota