Open-end Organizational Structures and Limits to Arbitrage
Review of Financial Studies, Forthcoming
70 Pages Posted: 22 Apr 2014 Last revised: 14 Mar 2017
Date Written: March 1, 2017
We provide evidence that open-end structures undermine asset managers’ incentives to attack long-term mispricing. First, we compare open-end funds with closed-end funds. Closed-end funds purchase more underpriced stocks than open-end funds, especially if the stocks involve high arbitrage risk. We then show that hedge funds with high share restrictions, having a lower degree of open-ending, also trade against long-term mispricing to a larger extent than other hedge funds. Our analysis suggests that open-end organizational structures are not conducive to long-term risky arbitrage.
Keywords: Limits to Arbitrage, Redemption Risk, Capital Structure, Market Efficiency
JEL Classification: G12, G23
Suggested Citation: Suggested Citation