Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs
Owen A. Lamont
Harvard University - Department of Economics
Richard H. Thaler
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Journal of Political Economy, Vol. 111, April 2003
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.
Date posted: June 16, 2003