The Survival Discount and the Contagion Premium
59 Pages Posted: 4 Mar 2019 Last revised: 7 Jan 2021
Date Written: December 27, 2019
In our model, companies with lower survival rates display an ex-post premium relative to those with higher survival rates, due to missing defaulted companies. Thus, one can estimate the survivorship bias by comparing company types with different survival rates, like conglomerates and focused firms. We find that the conglomerate discount drops from 12.3% to 2.4% as survival probability falls. Moreover, lower-survival conglomerates display a 15% contagion premium. These patterns are absent at the time of conglomerate formation, when there is no survivorship bias. We conclude that stock prices do not reflect the ex-ante expected value of companies with heterogeneous mortality.
Keywords: survivorship bias, default, coinsurance, contagion, conglomerate discount
JEL Classification: G1, G14, G3
Suggested Citation: Suggested Citation