Does Bankruptcy Risk Increase Value? Puzzles and Diversification

Does Bankruptcy Risk Increase Value? Puzzles and Diversification

Michela Altieri, Giovanna Nicodano

Series number :

Serial Number: 
600/2019

Date posted :

March 13 2019

Last revised :

March 12 2019
SSRN Share

Keywords

  • diversification discount • 
  • survivorship bias • 
  • parent company discount • 
  • Bankruptcy • 
  • coinsurance • 
  • contagion

Stock markets price listed firms, while defaulted firms delist. Due to the lower profits of defaulted firms, the average stock price exceeds firm unconditional expected value. Such price-value wedge originates from a survivorship bias. The wedge is higher for those company types with lower survival probability.

This bias thus explains the discount on diversified companies which survive to downturns, while the least profitable among focused companies default. This insight finds support in both the excess survival of US diversified firms compared to focused ones and its co-variation with their discount.
 

Authors

Real name:
Michela Altieri