This paper studies how survival affects stock prices. We show that the average stock price of surviving firms exceeds the average value of surviving plus defaulted firms. This price-value wedge generates puzzles involving firm types with different mortality, since the wedge is narrower for types with higher survival. Thus, self-selection leads to a discount for types with lower bankruptcy probability. This research will investigate whether this insight explains the cross sectional diversification discount. It may also investigate whether it explains additional pricing puzzles.
