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

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 receivexshares of company B, but the price of A is less thanxtimes the price of B...

Full description

Saved in:
Bibliographic Details
Published inThe Journal of political economy Vol. 111; no. 2; pp. 227 - 268
Main Authors Lamont, Owen A., Thaler, Richard H.
Format Journal Article
LanguageEnglish
Published Chicago The University of Chicago Press 01.04.2003
University of Chicago, acting through its Press
Subjects
Arbitrage
Assets
Economic theory
Efficiency
Efficient markets
Equity
Financial securities
Growth stocks
Hypotheses
Initial public offerings
Investments
Investors
Law of one price
Market prices
Noise
Political economy
Political science
Prices
Securities markets
Shareholders
Shares outstanding
Short sales
Stock prices
Stock shares
Stockholders
Stocks
Studies
Technology
Technology stocks
Trade
U.S.A
Violations
Online AccessGet full text

Cover

More Information
Summary: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 receivexshares of company B, but the price of A is less thanxtimes 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.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0022-3808
1537-534X
DOI:10.1086/367683