Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs

Lamont, Owen A.; Thaler, Richard H.

doi:10.2139/ssrn.249981

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Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs

61 Pages Posted: 16 Dec 2000

See all articles by Owen A. Lamont

Owen A. Lamont

Harvard University - Department of Economics

Richard H. Thaler

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

There are 3 versions of this paper

Date Written: May 2001

Abstract

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.

Keywords: Carve-out, mispricing, arbitrage, put-call parity, short-sale constraints

JEL Classification: G14

Suggested Citation: Suggested Citation

Lamont, Owen A. and Thaler, Richard H., Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs (May 2001). Available at SSRN: https://ssrn.com/abstract=249981 or http://dx.doi.org/10.2139/ssrn.249981