The Parent Company Puzzle: When is the Whole Worth Less than One of the Parts?

Posted: 15 Apr 2002

See all articles by Qiao Liu

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Bradford Cornell

Anderson Graduate School of Management, UCLA

Abstract

This paper examines seven instances in which the market value of a parent company was less than the market value of its publicly traded subsidiary. Efforts are made to explain this "parent company puzzle" in terms of taxes, agency costs, liquidity effects and noise trader risk. None of them work. The only explanation consistent with the evidence is a mispricing of the subsidiary shares associated with noise trader demand and impediments to arbitrage. As further evidence in support of this view, five corporate control transactions, all designed to exploit the apparent mispricing, were initiated while this research was in progress.

Keywords: parent company puzzle, taxes, mispricing

Suggested Citation

Liu, Qiao and Cornell, Bradford, The Parent Company Puzzle: When is the Whole Worth Less than One of the Parts?. Available at SSRN: https://ssrn.com/abstract=297559

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Bradford Cornell

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

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