Last week I featured Urbana Corp (URB) (URB.A) in a post related to the spread between Urbana’s two share classes which differ only in relation to voting rights. I concluded that the magnitude of the spread seemed not to be justified. In a recent study, Paul Schultz and Sophia Shive looked at all similar instances from 1993 to 2006 (there were 100 companies):
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.
Applying this to Urbana’s case, we can accept the conclusion in my earlier post (long-short arbitrage isn’t the right way to invest in this situation), and say that it is likely that URB.A, as the more liquid of the share classes, is responsible for the price discrepancy. URB.A, is currently trading at $1.29 vs NAV of $2.07, whereas URB is trading at $1.53. So, rather than URB falling to $1.29, it is likely that URB.A would rise. Also, given Tom Caldwell’s annual letter here, I have faith that both share classes will ultimately come to reflect NAV, so there seems to be a good amount of upside here.
Read the study here.
Author Disclosure: Long Urbana Corp
Talk to Frank about dual class share price anomalies here
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