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

  • Owen A. Lamont
  • Richard H. Thaler

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 19982000 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.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 111 (2003)
Issue (Month): 2 (April)
Pages: 227-268

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Handle: RePEc:ucp:jpolec:v:111:y:2003:i:2:p:227-268
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