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)

Multiple version iconThere 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

Lamont, Owen A. and Thaler, Richard H., Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs (May 2001). CRSP Working Paper No. 528. Available at SSRN: https://ssrn.com/abstract=249981 or http://dx.doi.org/10.2139/ssrn.249981

Owen A. Lamont (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Richard H. Thaler

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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