The efficient market hypothesis suggests that whenever mispricing occurs, rational traders get an opportunity for low-risk profit. Riskless profit opportunities do not exist, or only for a noticeably short time because arbitrage will eliminate them. Similarly, you can assume that there are no 100-dollar bills on the pavement, or only for a very short time because someone will pick them up. But what if the best 100-dollar bills collectors (such as the arbitrageurs) are limited in their movements? It might become way more difficult to fully exploit this huge profit opportunity, and thus the bill (or part of it) will stay longer on the pavement. Limits to arbitrage describe how these rational traders are constrained as to how much they can profit from mispricing in the market. Lamont & Thaler (2003) ask if “the market can add and subtract”, and the answer is a clear NO. Their paper focuses on equity carve-outs of US technology stocks. An equity carve-out, also known as a p...