Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
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.
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. citation courtesy of