Bankruptcy, Value Puzzles and the Survivorship Bias

This paper argues that a survivorship bias distorts upwards the measurement of the average ex-post firm value, because bankruptcy cancels firms with low realized cash flows from databases. This survivorship bias, that increases in bankruptcy probability, generates known pricing puzzles across types of firms. For instance, it turns a true ex-ante diversification premium, due to lower expected bankruptcy costs in conglomerates, into an apparent ex post diversification discount. Similarly, it makes a parent company appear to trade at a discount relative to its stand-alone counterpart because the parent survives to recessions more often than the stand-alone firm.