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Open-End Organizational Structures and Limits to Arbitrage

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  • Mariassunta Giannetti
  • Bige Kahraman

Abstract

We provide evidence that open-end organizational structures undermine incentives for asset managers to attack long-term mispricing. We compare open-end funds with closed-end funds. Closed-end funds purchase more underpriced stocks than do open-end funds, especially if the stocks involve high arbitrage risk. We then show that hedge funds with highshare restrictions having a lower degree of open-endedness also trade against long-term mispricing to a larger extentthan do other hedge funds. Our analysis suggests that open-end organizational structures are not conducive to long-term risky arbitrage. Received November 4, 2015; editorial decision March 10, 2017 by Editor Andrew Karolyi.

Suggested Citation

  • Mariassunta Giannetti & Bige Kahraman, 2018. "Open-End Organizational Structures and Limits to Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 773-810.
  • Handle: RePEc:oup:rfinst:v:31:y:2018:i:2:p:773-810.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx057
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    Cited by:

    1. Timmer, Yannick, 2018. "Cyclical investment behavior across financial institutions," ESRB Working Paper Series 77, European Systemic Risk Board.
    2. Boyarchenko, Nina & Eisenbach, Thomas M. & Gupta, Pooja & Shachar, Or & Van Tassel, Peter, 2018. "Bank-intermediated arbitrage," Staff Reports 858, Federal Reserve Bank of New York, revised 01 Jul 2018.

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