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Mispricing of dual-class shares: Profit opportunities, arbitrage, and trading

  • Schultz, Paul
  • Shive, Sophie
Registered author(s):

    This is the first paper to examine the microstructure of how mispricing is created and resolved. We study dual-class shares with equal cash flow rights and show that a simple trading strategy exploiting gaps between their prices appears to create abnormal profits after transactions costs. Trade and quote data show that investors shift their trading patterns to take advantage of gaps. Contrary to common perception, long-short arbitrage plays a minor part in eliminating gaps, and one-sided trades correct most of them. We also show that the more liquid share class is usually responsible for the price discrepancies.

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    File URL: http://www.sciencedirect.com/science/article/B6VBX-50HYGCW-1/2/606e70a5823dea93b67f54477af6f020
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 98 (2010)
    Issue (Month): 3 (December)
    Pages: 524-549

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    Handle: RePEc:eee:jfinec:v:98:y:2010:i:3:p:524-549
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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