Arbitrage in Dual Classes: The Case of Berkshire Hathaway

Abstract

I test the existence of arbitrage risk due to a lack of substituting securities, using the no-arbitrage condition implied by the one-way conversion rule from Class A to Class B shares of Berkshire Hathaway. This rule prevents large premiums but allows for significant and time-varying discounts on Class B shares, supporting the existence of arbitrage risk. I provide an estimate of arbitrage costs at 0.05% in recent years. I also document that Class B trades reflect both positive and negative information onto Class A prices, and that unusual price deviations between these two share classes predict future Class A returns.

Keywords: The law of one price, market efficiency, financial decision

JEL Classification: G14, G32