This paper documents a strong violation of the law of one price surrounding a large rights issue.
If prices are right, the relation between the prices of shares and rights follows the outcome of a simple calculation.
In the case of Royal Imtech N.V. in 2014, prices deviated sharply and persistently from the theoretical prediction. Throughout the term of the rights, investors were buying shares at prices that were many times what they should have been given the price of the rights. Short-selling constraints in the form of high recall risk and lacking stock lending supply are the most likely explanation for the failure of arbitrage as a safeguard of market efficiency. Still, it remains remarkable that investors were buying large volumes of shares at highly inflated prices in the presence of a cheap, perfect substitute.
The mispricing was special not just because of its severity but also because unlike previously documented cases there was no fundamental risk and no material noise trader risk.
The authors thank Svetlana Borovkova, David Hirshleifer, Albert Menkveld, Maurizio Montone, Rogier Potter van Loon, Jason Zweig and three anonymous (former) professional traders for their valuable comments and support. The paper also benefited from discussions with seminar participants at the Dutch Authority for the Financial Markets (AFM) and with conference participants at SABE/IAREP 2018 London and RBFC 2018 Amsterdam.
van den Assem, M.J., van Dolder, D., Zwinkels, R.C.J. and Schauten, M.B.J. (2022), "Can the market divide and multiply? A case of 807 percent mispricing", Review of Behavioral Finance, Vol. 14 No. 1, pp. 35-44. https://doi.org/10.1108/RBF-01-2020-0009
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