Can the Market Divide and Multiply? A Case of 807 Percent Mispricing under Short-Selling Constraints
11 Pages Posted: 21 Jun 2018 Last revised: 1 Nov 2018
Date Written: August 9, 2018
Abstract
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. Short-selling constraints in the form of recall risk and lacking stock lending supply exclusively explain the failure of arbitrage as a safeguard of market efficiency.
Keywords: law of one price, market efficiency, mispricing, limits of arbitrage, short-sale constraints
JEL Classification: G12, G14, G40
Suggested Citation: Suggested Citation
