Apr 11, 2011

Crawford & Company CRD-A/B Arbitrage

The stock market is one of the few places where two nearly identical goods are bought and sold for vastly different prices.  Consider the example of Crawford & Company, an insurance services provider based in Atlanta, GA.

Crawford has two classes of stock, Class A (CRD.A) and Class B (CRD.B).  The two classes share identical economic interests and similar liquidity profiles.  However, the Class A shares have no voting rights, while the Class B shares have votes, and thereby should command a premium.  How much of a premium?  According to currently quoted prices, B shares are currently 43% more expensive than A shares ($4.60 vs $3.20)!!

The biggest risk for potential arbitrageurs are

  1. the possibility of this price discrepancy further expanding 
  2. the timeliness of the convergence.

As the below graph shows, the current B-share premium of 43% is high by historical standards.  However, the premium exploded during the financial crisis - the possibility of Risk 1 clearly rises during periods of acute financial distress.  Interestingly, the spread pre-crisis ranged from 0-20%, while post-crisis, the spread has shifted upwards to a new range of 20-40%.

3 comments:

  1. If i give you five talents now, can i trust that you will double it when i return to america?

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  2. a rich young ruler...i am two of these things. haha.

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  3. The poor servant got a bad rap - there are worse things than being timid/incompetent, like being dishonest/immoral...

    in response, i certainly wouldn't want you to come back to the u.s. to find that you are not as wealthy as someone may have otherwise promised you :)

    more practically, when entrusting talent to others, i think the proper attitude is - Hope for the best, Do not be surprised by the worst...

    enjoy ur trip!

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