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The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination

Banal-Estanol, A., Ottaviani, M. & Winton, A. (2013). The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination. The Review of Financial Studies, 26(12), pp. 3142-3181. doi: 10.1093/rfs/hht049


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.

Publication Type: Article
Additional Information: This article has been accepted for publication in The Review of Financial Studies. Published by Oxford University Press
Publisher Keywords: Default costs, conglomeration, mergers, spin-offs, project finance, risk contamination, coinsurance.
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Policy & Global Affairs > Economics
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