Remember the Seagate Technology case...Also, as a side note, I am one of the founders (with Ken Lehn of the University of Pittsburgh) of the Journal that this article appears. There is no paper to download, only the abstract below...from SSRN.
Qiao Liu
University of Hong Kong - School of Economics and Finance
Bradford Cornell
California Institute of Technology
Journal of Corporate Finance, Vol. 7, pp. 341-366, December 2001
-----Also see the abstract below [No paper download option]
Abstract:
This paper examines seven instances in which the market value of a parent company was less than the market value of its 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 noise trader demand and impediments to arbitrage. 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.
Frank Schuhmacher
University of Applied Sciences and Technology Aachen (RWTH Aachen)
Martin Eling
University of Muenster - Faculty of Economics
FInancial Markets and Portfolio Management, Vol. 19, No. 1, 2005
Abstract:
In this paper, we investigate the German stock market with regard to "negative stub values" or "parent company puzzles." These are situations where a firm's market value is less than the value of its ownership stake in a publicly traded subsidiary. According to MITCHELL/PULVINO/STAFFORD (2002), negative stub values indicate clear arbitrage opportunities, which sometimes exist and persist. First, we have collected five years of German stock market data from 1999 to 2003 in order to construct a sample of eleven negative stub values. Second, we analysed the performance of investment strategies based on the parent company puzzle. Finally, we applied different traditional closed-end fund discount and other theories to our sample of negative stub values. This study supports the view of MITCHELL/PULVINO/STAFFORD (2002), that mispricings exist and persist, because of costs associated with imperfect information. Due to imperfect information the ex ante expected profits of finding and exploiting negative stub values may be so small, that arbitrageurs do not enter the business of eliminating mispricings.
Also, see the study below. You can download a copy from the SSRN page.
Mark L. Mitchell
CNH Partners
Todd C. Pulvino
Northwestern University - Kellogg School of Management
Erik Stafford
Harvard Business School
October 2000
Harvard Business School Working Paper No. 01-069
Abstract:
This paper examines the impediments to arbitrage in 82 situations between 1985 and 2000, where the market value of a company is less than the sum of its publicly traded parts. These situations suggest clear arbitrage opportunities and provide an ideal setting in which to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. We find that 30% of the situations terminate without converging. Furthermore, because of forced liquidation to satisfy capital requirements, we estimate that the returns to a specialized arbitrageur would be 50% larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks appear to be an important obstacle.
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