Can the Market Divide and Multiply? A Case of 807 Percent Mispricing in Absence of Arbitrage Risk
9 Pages Posted:
Date Written: June 8, 2018
This paper documents a strong violation of the law of one price surrounding a large-size rights issue. If prices are right, the relation between the prices of shares and rights follows the outcome of a simple calculation. In the case of Royal Imtech N.V. prices deviated sharply from the theoretical prediction. Throughout the term of the rights, investors were buying shares at prices that were up to nine times what they should have been given the price of the rights. The most likely explanation for the sizeable and persistent mispricing is the limited availability of shares for short selling.
Keywords: law of one price, market eciency, mispricing, limits of arbitrage, rights issue
JEL Classification: G12, G14, G40
Suggested Citation: Suggested Citation