Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
61 Pages Posted: 16 Dec 2000
Date Written: May 2001
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