Can the Market Divide and Multiply? A Case of 807 Percent Mispricing under Short-Selling Constraints

12 Pages Posted: 21 Jun 2018 Last revised: 16 Sep 2018

Marc Schauten

Vrije Universiteit Amsterdam

Martijn J. van den Assem

VU Amsterdam - School of Business and Economics

Dennie van Dolder

VU Amsterdam - School of Business and Economics; Centre for Decision Research and Experimental Economics (CeDEx) - University of Nottingham

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

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 should follow 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 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

Schauten, Marc and van den Assem, Martijn J. and van Dolder, Dennie and Zwinkels, Remco C.J., Can the Market Divide and Multiply? A Case of 807 Percent Mispricing under Short-Selling Constraints (August 9, 2018). Available at SSRN: https://ssrn.com/abstract=3193120 or http://dx.doi.org/10.2139/ssrn.3193120

Marc Schauten

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Martijn J. Van den Assem (Contact Author)

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Dennie Van Dolder

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Centre for Decision Research and Experimental Economics (CeDEx) - University of Nottingham ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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