Can the Market Divide and Multiply? A Case of 807 Percent Mispricing under Short-Selling Constraints

Abstract

This paper documents a strong violation of the law of one price surrounding a large-size rights issue. If prices are right, the relation between the prices of shares and rights should follow the outcome of a simple calculation. In the case of Royal Imtech N.V. prices deviated sharply from the theoretical prediction. Throughout the term of the rights, investors were buying shares at prices that were up to nine times what they should have been given the price of the rights. Short-selling constraints explain the failure of arbitrage as a safeguard of market efficiency.