Paper #1191

Títol:

Conglomeration with bankruptcy costs: Separate or joint financing?

Autors:

Albert Banal-Estañol i Marco Ottaviani

Data:

Febrer 2009

Resum:

The paper analyzes the determinants of the optimal scope of incorporation in the presence of bankruptcy costs. Bankruptcy costs alone generate a non-trivial tradeoff between the benefit of coinsurance and the cost of risk contamination associated to joint financing corporate projects through debt. This tradeoff is characterized for projects with binary returns, depending on the distributional characteristics of returns (mean, variability, skewness, heterogeneity, correlation, and number of projects), the bankruptcy recovery rate, and the tax rate advantage of debt relative to equity. Our testable predictions are broadly consistent with existing empirical evidence on conglomerate mergers, spin-offs, project finance, and securitization.

Paraules clau:

Bankruptcy, conglomeration, mergers, spin-offs, project finance

Codis JEL:

G32, G34.

Àrea de Recerca:

Economia de l'Empresa i Organització Industrial / Finances i Comptabilitat / Gestió de la Producció i de les Operacions

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