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This is the first paper to examine the microstructure of how mispricing is created and resolved. The authors study an easily observable type of mispricing, i.e. dual class-shares with equal cash-flow rights but different prices, and show that a simple trading strategy creates abnormal profits that survive transactions costs and battery of conservative robustness checks. Trade data from TAQ shows that investors shift their trading patterns to take advantage these mispricings. Contrary to common perception, long-short arbitrage plays a minor part in eliminating mispricing. Instead, one-sided trades correct the bulk of the mispricing.
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