The Parent Company Puzzle on the German Stock Market

In this paper, we investigate the German stock market with regard to negative stubvalues or parent company puzzles. These are situations where a firms marketvalue is less than the value of its ownership stake in a publicly traded subsidiary.According to MITCHELL/PULVINO/STAFFORD (2002), negative stub valuesindicate clear arbitrage opportunities, which sometimes exist and persist. First, wehave collected five years of German stock market data from 1999 to 2003 in orderto construct a sample of eleven negative stub values. Second, we analysed the performanceof investment strategies based on the parent company puzzle. Finally, weapplied different traditional closed-end fund discount and other theories to oursample of negative stub values. This study supports the view of MITCHELL/PULVINO/STAFFORD (2002), that mispricings exist and persist, because of costsassociated with imperfect information. Due to imperfect information the ex anteexpected profits of finding and exploiting negative stub values may be so small,that arbitrageurs do not enter the business of eliminating mispricings.