Giovanna Nicodano (Collegio Carlo Alberto)

“Does Bankruptcy Risk Increase Value?”

Abstract
We show that bankruptcy exposure increases ex-post average firm value due to a survivorship bias. The reason is that bankruptcy cancels rms with the lowest realized cash ows from databases. Such bias gives rise to known pricing puzzles. It generates a discount on diversified companies when diversification helps their survival. Moreover, it distorts inference on firm efficiency, turning a diversification premium, due to lower expected bankruptcy costs, into a discount. This insight finds support in both the excess survival of US diversied firms and its co-variation with their discount.