The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination

Abstract

This paper characterizes when joint …nancing of two projects through debt increases expected default costs, contrary to conventional wisdom. Separate …nancing dominates joint …nancing 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 …nancing becomes more attractive than joint …nancing 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-o¤s, project …nance, and securitization.Journal of Economic Literature Classi…cation Codes: G32, G34.

International project finance: review and implications for international finance and international business

“…Berkovitch and Kim (1990), John and John (1991), and Chemmanur and John (1996) continued the tradition of formal modelling to include agency cost benefits, tax benefits, and bankruptcy costs in PF. These results were later supported by the formal works on the optimal scope of firms from Leland (2007) and Banal-Estañol et al (2013). These finance models positioned PF as a superior form of financing for high risk investments, but they strongly focused on financial benefits and applied rather restrictive formal modelling.…”

Does Bankruptcy Risk Increase Value? Puzzles and Diversification

“…where Y it is an indicator variable equal to 1 when the firm goes bankrupt at time t. The vector x includes the predictive variables from Campbell, Hilscher, and Szilagyi (2008). 6 We experiment with two different dependent variables, a narrower one (default) and a broader one (failure), as alternative indicators of financial distress. Default events includes cases filed under both Chapter 7 and Chapter 11, while failure also includes a default on a bond.…”

“…c. We can define the differential values across organizations, by appropriately combining Equations (5), (6), and (7), as follows: increases in its relative survival ability. Therefore, the larger the true diversification premium of a firm, the larger its "market" diversification discount.…”

The Pecking Order of Segmentation and Liquidity-Injection Policies in a Model of Contagious Crises

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“…To see that the difference λqk − (1 − λ) mk is positive, use equations(5) and(6) to solve out R as a function of w and substitute in equation(8).…”