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

60 Pages Posted: 17 May 2001 Last revised: 22 Oct 2014

Owen A. Lamont

Harvard University - Department of Economics

Richard H. Thaler

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

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Date Written: May 2001

Abstract

Recent 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.

Suggested Citation

Lamont, Owen A. and Thaler, Richard H., Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs (May 2001). NBER Working Paper No. w8302. Available at SSRN: https://ssrn.com/abstract=270372

Owen A. Lamont (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
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United States

Richard H. Thaler

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
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