The Parent Company Puzzle on the German Stock Market

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.