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Closed-End Fund Discounts with Informed Ownership DifferentialGustavo GrullonRice University - Jesse H. Jones Graduate School of Business F. Albert WangUniversity of Dayton - School of Business Administration - Department of Economics and Finance January 2000 Abstract: We develop a theoretical model to examine the closed-end fund discount. Our model identifies three causes for this phenomenon: (i) a self-fulfilling prophecy, (ii) a risk premium for the fund price risk, and (iii) a risk premium for informed ownership differential between the fund and its underlying assets. The model highlights the important role of asymmetric information between institutional and individual investors in explaining the discount and predicts a positive relationship between the discount and the quality of private information in the underlying assets. Using a sample of US equity closed-end funds, we test this prediction and find consistent evidence.
Number of Pages in PDF File: 66 JEL Classification: G12 working papers seriesDate posted: March 29, 2000Suggested CitationContact Information
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