Survival and Pricing Puzzles
65 Pages Posted: 4 Mar 2019 Last revised: 7 Jan 2020
Date Written: December 27, 2019
This paper studies the informativeness of stock prices, after some companies have defaulted. We show that the average price of companies in the stock market exceeds the average value of surviving plus defaulted companies. This price-value wedge is narrower for company types with higher survival. The latter thus display a discount relative to lower survival types, even when they differ only in mortality. Thus, a ”‘pricing puzzle”’ stems from the different company survival. Consistent with this argument, we find that discounted diversified conglomerates survive more, on average, than focused companies. This holds after adding the usual controls for the discount, including age. The conglomerate discount widens from 5.6% to 13.3% when measured on companies with increasing survival probability.
Keywords: survivorship bias, asset pricing, market efficiency, diversification discount, parent company discount
JEL Classification: G32, D23, K19
Suggested Citation: Suggested Citation