00Thaler_FM i-xxvi.qxd

Heaton, John, and Deborah Lucas, 1999, Stock Prices and Fundamentals, in Ben S. Bernanke and Julio J. Rotemberg (eds.), NBER Mac ...

Chapter 4 CAN THE MARKET ADD AND SUBTRACT? MISPRICING IN TECH STOCK CARVE-OUTS Owen A. Lamont and Richard H. Thaler 1.Introducti ...

The driver of the law of one price in financial markets is arbitrage, de- fined as the simultaneous buying and selling of the sa ...

noise trader risk. An arbitrageur that buys the fund and shorts the underly- ing shares runs the risk that the discount may wide ...

3Com, thereby acquiring a claim to 150 shares of Palm plus a portion of 3Com’s other assets. Since the price of 3Com’s shares ca ...

some other reason willing to hold overpriced assets. We shall refer to these conditions collectively as “irrational,” but they c ...

We study a sample of equity carve-outs in which the parent firm explic- itly states its intention to immediately spin off its re ...

to complete its divestiture of Palm approximately six months following this offering by distributing all of the shares of Palm c ...

MISPRICING IN TECH STOCK CARVE-OUTS 137 Table 4.1 Sample of Carve-outs Distribution Negative Issue Date Parent Subsidiary Date S ...

of mispricing. So negative stubs should be considered the extreme cases of unambiguous mispricing. For the potential negative st ...

Table 4.2 Stub Values and Market Values between IPO and Distribution Max Market Trading Days Min Stub, S p Min Stub, S p Val ue ...

C. Time Pattern of Negative Stubs Figures 4.1– 4.4 show the time series of stub values for the six cases of nega- tive stubs. Ex ...

IRS approval and the consequent announcement of a distribution date (oc- curring on the same day) cause the stub to go from nega ...

efficiency. The fact that we find six such cases indicates that the highly pub- licized Palm example was not unique.^5 Second, a ...

high returns with low (and largely idiosyncratic) risk. However, we caution readers not to rush out to form hedge funds to explo ...

amounts into the long portfolio (consisting of riskless assets and the parent) and the short portfolio (consisting of the subsid ...

Table 4.3 Total Returns from First Negative Stub to Announcement/Distribution Days First Announcement Day Plus One Distribution ...

Table 4.4 shows estimates of a capital asset pricing model (CAPM) equa- tion. Although the strategy has a positive and significa ...

C. Risks Specific to Stubs Since our sample is so small, it is useful to discuss some events that did not occur but might be exp ...

address these concerns we shall turn to the options market for additional evidence on mispricing. Short-Sale Constraints and th ...