PRICE ADJUSTMENT DELAYS AND ARBITRAGE COSTS - EVIDENCE FROM THE BEHAVIOR OF CONVERTIBLE PREFERRED PRICES

Price adjustment delays occur between in-the-money convertible preferr ed stock prices and common stock prices. Convertible preferred prices systematically deviate from the prices predicted from their conversion relations with common stocks. The price predictability stems from pri ce changes in the underlying common stocks leading the price changes i n the convertible preferred stocks by up to nine hours. Cross-sectiona lly, about 70 percent of the variation in the unsigned size of the pri ce deviations is explained by proxies for costs of arbitrage.