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

2003; University of Chicago Press; Volume: 111; Issue: 2 Linguagem: Inglês

10.1086/367683

1537-534X

Owen Lamont, Richard H. Thaler,

Financial Reporting and Valuation Research

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.