Closed-End Fund Discounts with Informed Ownership Differential
Rice University - Jesse H. Jones Graduate School of Business
F. Albert Wang
University of Dayton - School of Business Administration - Department of Economics and Finance
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: G12working papers series
Date posted: March 29, 2000
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