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The Survival Discount and the Contagion Premium

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.