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Price discovery in dual-class shares across multiple markets

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  • Fernandes, Marcelo
  • Scherrer, Cristina M.
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    Abstract

    We extend the standard price discovery analysis to estimate the informationshare of dual-class shares across domestic and foreign markets. By examining both commonand preferred shares, we aim to extract information not only about the fundamental valueof the rm, but also about the dual-class premium. In particular, our interest lies on theprice discovery mechanism regulating the prices of common and preferred shares in theBM&FBovespa as well as the prices of their ADR counterparts in the NYSE and in the Arcaplatform. However, in the presence of contemporaneous correlation between the innovations,the standard information share measure depends heavily on the ordering we attribute toprices in the system. To remain agnostic about which are the leading share class and market,one could for instance compute some weighted average information share across all possibleorderings. This is extremely inconvenient given that we are dealing with 2 share prices inBrazil, 4 share prices in the US, plus the exchange rate (and hence over 5,000 permutations!).We thus develop a novel methodology to carry out price discovery analyses that does notimpose any ex-ante assumption about which share class or trading platform conveys moreinformation about shocks in the fundamental price. As such, our procedure yields a singlemeasure of information share, which is invariant to the ordering of the variables in thesystem. Simulations of a simple market microstructure model show that our informationshare estimator works pretty well in practice. We then employ transactions data to studyprice discovery in two dual-class Brazilian stocks and their ADRs. We uncover two interesting ndings. First, the foreign market is at least as informative as the home market. Second,shocks in the dual-class premium entail a permanent e ect in normal times, but transitoryin periods of nancial distress. We argue that the latter is consistent with the expropriationof preferred shareholders as a class.

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    Bibliographic Info

    Paper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number 344.

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    Date of creation: 09 Dec 2013
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    Handle: RePEc:fgv:eesptd:344

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    1. Smith, Brian F. & Amoako-Adu, Ben, 1995. "Relative Prices of Dual Class Shares," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(02), pages 223-239, June.
    2. Frijns, Bart & Schotman, Peter, 2009. "Price discovery in tick time," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 759-776, December.
    3. Roger D. Huang, 2002. "The Quality of ECN and Nasdaq Market Maker Quotes," Journal of Finance, American Finance Association, vol. 57(3), pages 1285-1319, 06.
    4. Brownlees, C.T. & Gallo, G.M., 2006. "Financial econometric analysis at ultra-high frequency: Data handling concerns," Computational Statistics & Data Analysis, Elsevier, vol. 51(4), pages 2232-2245, December.
    5. Zingales, Luigi, 1995. "What Determines the Value of Corporate Votes?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1047-73, November.
    6. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May.
    7. Erik Hupperets & Bert Menkveld, 2000. "Intraday Analysis of Market Integration: Dutch Blue Chips traded in Amsterdam and New York," Tinbergen Institute Discussion Papers 00-018/2, Tinbergen Institute.
    8. Li, Hongyi & Maddala, G. S., 1997. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 80(2), pages 297-318, October.
    9. Zingales, Luigi, 1994. "The Value of the Voting Right: A Study of the Milan Stock Exchange Experience," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 125-48.
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