The Parent Company Puzzle: When is the Whole Worth Less than One of its Parts

The Anderson School at UCLA Finance Working Paper #7-00

41 Pages Posted: 8 Nov 2000

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Date Written: August 2000

Abstract

This paper examines seven instances in which the market value of a parent company was less than the market value of its holdings of a publicly traded subsidiary. Efforts are made to explain this "parent company puzzle" in terms of taxes, agency costs, liquidy effects and noise trader risk. None of them work. The only explanation consistent with the evidence is a mispricing of the subsidiary shares associated with a downward sloping demand curve. As further evidence in support of this view, five corporate control transactions, all designed to exploit the apparent mispricing, were initiated while this research was in progress.

JEL Classification: G12, G14

Suggested Citation

Cornell, Bradford and Liu, Qiao, The Parent Company Puzzle: When is the Whole Worth Less than One of its Parts (August 2000). The Anderson School at UCLA Finance Working Paper #7-00, Available at SSRN: https://ssrn.com/abstract=239432 or http://dx.doi.org/10.2139/ssrn.239432

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Qiao Liu

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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