THE JOURNAL OF FINANCE • VOL. LVII, NO. 2 • APRIL 2002

Limited Arbitrage in Equity Markets

MARK MITCHELL, TODD PULVINO, and ERIK STAFFORD

ABSTRACT

We examine 82 situations where the market value of a company is less than its
subsidiary. These situations imply arbitrage opportunities, providing an ideal setting
to study the risks and market frictions that prevent arbitrageurs from immediately
forcing prices to fundamental values. For 30 percent of the sample, the link
between the parent and its subsidiary is severed before the relative value discrepancy is corrected. Furthermore, returns to a specialized arbitrageur would be 50 percent larger if the path to convergence was smooth rather than as observed.
Uncertainty about the distribution of returns and characteristics of the risks limits
arbitrage.