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

TLDR

Recent equity carve‑outs in U.S. technology stocks appear to violate the principle that identical assets should trade at the same price, as illustrated by the 3Com–Palm example. The study examines 1998–2000 carve‑outs where a share of company A should convert to x shares of company B, yet A trades below x times B’s price, and short‑sale constraints prevent arbitrage from correcting this mispricing.

Abstract

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 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 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.