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The Parent Company Puzzle: When is the Whole Worth Less Than One of its Parts?" forthcoming, Journal of Corporate Finance

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  • Cornell, Bradfor
  • Liu, Quiao

Abstract

This paper examines seven instances in which the market value of a parent company was less than the market value of its holdings of a publicly traded subsidiary. Efforts are made to explain this “parent company puzzle” in terms of taxes, agency costs, liquidity effects and noise trader risk. None of them work. The only explanation consistent with the evidence is a mispricing of the subsidiary shares associated with a downward sloping demand curve. As further evidence in support of this view, five corporate control transactions, all designed to exploit the apparent mispricing, were initiated while this research was in progress.

Suggested Citation

  • Cornell, Bradfor & Liu, Quiao, 2000. "The Parent Company Puzzle: When is the Whole Worth Less Than One of its Parts?" forthcoming, Journal of Corporate Finance," University of California at Los Angeles, Anderson Graduate School of Management qt1sv5f5xf, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt1sv5f5xf
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    References listed on IDEAS

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    1. Summers, Lawrence H, 1986. "Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    2. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
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    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    7. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. "Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
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    Cited by:

    1. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.

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