NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Owen A. Lamont, Richard H. Thaler

NBER Working Paper No. 8302*
Issued in May 2001
NBER Program(s):   AP    CF

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.

*Published: Lamont, Owen A. and Richard H. Thaler. "Can The Market Add And Subtract? Mispricing In Tech Stock Carve-Outs," Journal of Political Economy, 2003, v111(2,Apr), 227-268.

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