Dual-Class Shares and Active Investment Strategies

Abstract

In this article, the authors propose a strategy that exploits significant deviations from parity between the two classes of shares for dual-class firms. The strategy involves taking a short position in one class and a long position in the other class, depending on whether the deviation is above or below parity. The analysis reveals potentially profitable opportunities for active investors. The authors “alpha test” the strategy on two sample firms (Blockbuster Entertainment and Lennar Homes) with a retail brokerage account to ensure that it is logistically feasible.

TOPICS: Risk management, statistical methods, exchanges/markets/clearinghouses