Mispricing of Dual-Class Shares: Profit Opportunities, Arbitrage, and Trading

60 Pages Posted: 6 Feb 2009 Last revised: 2 Nov 2009

Paul H. Schultz

University of Notre Dame - Department of Finance

Sophie Shive

University of Notre Dame - Department of Finance

Date Written: October 29, 2009

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.

Keywords: Dual-class shares, arbitrage, mispricing

JEL Classification: G12,G14

Suggested Citation

Schultz, Paul H. and Shive, Sophie, Mispricing of Dual-Class Shares: Profit Opportunities, Arbitrage, and Trading (October 29, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1338885 or http://dx.doi.org/10.2139/ssrn.1338885

Paul H. Schultz

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

Sophie Shive (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

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