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

Posted: 16 Jun 2003  

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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Abstract

Recent equity carve-outs in U.S. 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 this 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. Journal of Political Economy, Vol. 111, April 2003. Available at SSRN: https://ssrn.com/abstract=384240

Owen A. Lamont (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Richard H. Thaler

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)

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