that the shares owned by parents are not registered prior to the actual dis-
tribution to the shareholders and therefore cannot be publicly traded. Sec-
ond, lending shares might breach the fiduciary duties that parent directors
owe to the parent or subsidiary. Third, lending shares could jeopardize the
ability to do a spin-off tax-free by calling into question the “independent
business purpose” of the spin-off, or by reducing the parent’s control below
important tax thresholds.
We next look at options markets to get more complete quantitative evi-
dence on just how expensive it is to sell short.
D. Short-selling Constraints: Evidence from OptionsOptions can facilitate shorting, both because options can be a cheaper
way of obtaining a short position and because options allow short-sale-
constrained investors to trade with other investors who have better access
to shorting. Figlewski and Webb (1993) show that optionable stocks have
higher short interest. Sorescu (2000) finds that in the period from 1981 to
1995, the introduction of options for a specific stock caused its price to fall,
consistent with the idea that options allow negative information to become
impounded into the stock price.^7
In a frictionless market, one expects to observe put-call parity. It should
hold exactly (within trading costs) for European options and approxi-
mately for American options. One way of expressing put-call parity is to
say that synthetic shares (constructed using options plus borrowing and
lending) should have the same price as actual shares, plus or minus trading
costs such as the bid/ask spread. This equality is just another application of
the law of one price. A weaker condition than put-call parity, which should
always hold for non-dividend-paying American options, is the following in-
equality: the call price minus the put price is greater than the stock price
minus the exercise price. For options that are at-the-money (so that the op-
tion’s exercise price is equal to the current price of the stock), this inequal-
ity says that call prices should be greater than put prices.
For our six cases with negative stubs, three had exchange-traded Ameri-
can options within the relevant time frame: Xpedior, Palm, and Stratos. We
used weekly share prices and weekly options prices, as of 4:00 P.M.eastern
time on Friday.
Table 4.6 shows an example from the first week of trading in Palm’s op-
tions (occurring more than two weeks after the IPO) using options that are
closest to being at-the-money. Options on Palm display massive violations
of put-call parity and violate the weaker inequality as well. Instead of ob-
serving at-the-money call prices that are greater than put prices, we find
154 LAMONT AND THALER
(^7) This effect was present in our sample, since in the three cases with negative stubs, when
exchange-traded options were introduced, all three had sizable increases in the stub value. In
all three cases, the subsidiary fell on the day on which options started trading.