Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
Owen A. Lamont
Harvard University - Department of Economics
Richard H. Thaler
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
CRSP Working Paper No. 528
Recently equity carve-outs in US technology stocks appear to violate a basic premise of financial theory: identical assets have identical prices. In our 1998-2000 sample, holders of a share of company A are expected to receive x shares of company B, but the price of A is less than x times the price of B. A prominent example involves 3Com and Palm. Arbitrage does not eliminate these blatant mispricing due to short sale constraints, so that B is overpriced but expensive or impossible to sell short. Evidence from options prices shows that shorting costs are extremely high, eliminating exploitable arbitrage opportunities.
Number of Pages in PDF File: 61
Keywords: Carve-out, mispricing, arbitrage, put-call parity, short-sale constraints
JEL Classification: G14working papers series
Date posted: December 16, 2000
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