You're incorrect with regard to diversification. You can go short the good company and long equivalent bad company (or a basket of securities containing a bad

You're incorrect with regard to diversification. You can go short the good company and long equivalent bad company (or a basket of securities containing a bad company) and be more or less hedged until the premium for being a "good" company dissipates (and it very likely would.) You don't really lose diversification in this scenario, since you'd be able to construct a long/short basket that can have you market neutral with respect to systemic inputs to the valuations of both companies.