Mispricing of Dual-Class Shares: Profit Opportunities, Arbitrage, and Trading
60 Pages Posted: 6 Feb 2009 Last revised: 1 Nov 2023
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: Suggested Citation
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