Who Trades Against Mispricing?
75 Pages Posted: 18 Apr 2016
Date Written: March 2016
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 an impediment to arbitrage.
Keywords: Capital Structure, Flow performance Sensitivity, Limits to Arbitrage, Market Efficiency
JEL Classification: G12, G23
Suggested Citation: Suggested Citation