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). 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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,581
Abstract Views
17,513
Rank
15,891
PlumX Metrics