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

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  • Schultz, Paul
  • Shive, Sophie

Abstract

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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  • Schultz, Paul & Shive, Sophie, 2010. "Mispricing of dual-class shares: Profit opportunities, arbitrage, and trading," Journal of Financial Economics, Elsevier, vol. 98(3), pages 524-549, December.
    • Handle: RePEc:eee:jfinec:v:98:y:2010:i:3:p:524-549
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    19. Jordan, Bradford D. & Kim, Soohyung & Liu, Mark H., 2016. "Growth opportunities, short-term market pressure, and dual-class share structure," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 304-328.
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    23. Chin‐Ho Chen & Junmao Chiu & Huimin Chung, 2020. "Arbitrage opportunities, liquidity provision, and trader types in an index option market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 279-307, March.
    24. Oksana Kim, 2016. "Market Efficiency and Arbitrage Opportunities for Russian Depositary Receipts Cross-Listed on the London Stock Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-36, June.
    25. Kentaro Iwatsubo & Clinton Watkins, 2022. "Causality between Arbitrage and Liquidity in Platinum Futures," JRFM, MDPI, vol. 15(12), pages 1-17, December.

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