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

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  • OWEN A. LAMONT
  • RICHARD H. THALER
Abstract
Recent equity carve-outs in US 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 these 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Owen A. Lamont & Richard H. Thaler, "undated". "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," CRSP working papers 528, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    • Handle: RePEc:wop:chispw:528
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    File URL: http://gsbwww.uchicago.edu/fac/finance/papers/marketpaper.pdf
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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