A Solution to the Palm - 3Com Spin-Off Puzzles

24 Pages Posted: 5 Sep 2012 Last revised: 4 Sep 2013

See all articles by Martin Cherkes

Martin Cherkes

NYU

Charles M. Jones

Columbia Business School

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Date Written: August 31, 2013

Abstract

This paper revisits the relative pricing of Palm and 3Com shares in 2000. We offer a simple rational explanation of the Palm/3Com price relationship before Palm’s spinoff is completed. Lending fees and spin-off uncertainty are crucially important to understanding the relative levels and co-movement of Palm and 3Com share prices. We use Palm’s post-spinoff forward prices (calculated from the market prices of calls and puts) and model the spin-off uncertainty in valuing 3Com. Considering forward pricing and spin-off uncertainty resolves various pricing puzzles and explains the observed empirical evidence, including a sharp change in relative price behavior once the spinoff uncertainty is resolved on May 8, 2000.

Suggested Citation

Cherkes, Martin and Jones, Charles M. and Spatt, Chester S., A Solution to the Palm - 3Com Spin-Off Puzzles (August 31, 2013). Columbia Business School Research Paper No. 12/52. Available at SSRN: https://ssrn.com/abstract=2141355 or http://dx.doi.org/10.2139/ssrn.2141355

Martin Cherkes (Contact Author)

NYU ( email )

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Charles M. Jones

Columbia Business School ( email )

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HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

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