A solution to the Palm–3Com spinoff puzzles

This paper revisits the relative pricing of Palm and 3Com shares in 2000. This study offers a simple rational explanation of the Palm/3Com price relationship before Palm’s spinoff is completed. Lending fees and spinoff uncertainty are crucial to understanding the relative levels and co-movement of Palm and 3Com share prices. This study uses Palm’s post-spinoff forward prices (calculated from the market prices of calls and puts) and model the spinoff uncertainty in valuing 3Com. Considering forward pricing and spinoff uncertainty resolves many of the observed pricing puzzles, including the sharp change in relative price behavior once the spinoff uncertainty is resolved after trading on May 8, 2000.