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So over the next year they under perform by about 12-24 percent in total.The "stub value" of 3Com (the implied value of 3Com's non-Palm assets and businesses) was minus.In extreme cases, the rebate can be negative, meaning investors who sell short have to make a daily payment to the lender for the right to borrow the stock (instead of receiving a daily payment from the lender as interest payments on the short sale.(7 thus, for whatever reason, the amount of short selling was not enough to drive prices down to rational valuations.A 300 credit advance on the debt free card described in one go would become.If one had been able to costlessly short Palm and buy 3Com, one could have made very substantial returns.
Short Sale Constraints More Generally.
Consider a stock whose fundamental value is 100 (that is, 100 would be the share price in a frictionless world).Since the price of 3Com's shares can never be less than zero (equity values are never negative the price of 3Com should have been at least.5 times the price of Palm.Equity markets are not set up to make shorting easy.Thus something is constraining short selling, perhaps lack of knowledge about shorting, institutional constraints, risk, or cultural issues.8302, May 2001, and Journal of Political Economy, (April 2003.Breaking down 'Rebate selling short refers to selling securities that the investor does not own, which means that the investor must borrow securities to make delivery to a buyer.