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Mispricing of Dual-Class Shares: Profit Opportunities, Arbitrage, and TradingPaul H. SchultzUniversity of Notre Dame - Department of Finance Sophie ShiveUniversity of Notre Dame - Department of Finance October 29, 2009 EFA 2009 Bergen Meetings Paper 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 data from TAQ shows 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. Our findings have implications for the literature on risky arbitrage and asset pricing more generally.
Number of Pages in PDF File: 60 Keywords: Dual-class shares, arbitrage, mispricing JEL Classification: G12,G14 working papers seriesDate posted: February 6, 2009 ; Last revised: November 2, 2009Suggested CitationContact Information
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