Short Sale Restrictions, Differences of Opinion, and Closed-End Fund Discount

27 Pages Posted: 15 Nov 2010

See all articles by Lee W. Sanning

Lee W. Sanning

University of Wyoming - College of Business

Alexandre Skiba

University of Wyoming - College of Business - Department of Economics and Finance

Hilla Skiba

Colorado State University

Date Written: November 12, 2010

Abstract

The purpose of this paper is to study the closed-end fund discount in Miller’s (1977) framework. Miller’s theory states that in the simultaneous presence of (1) short sale restrictions and (2) dispersion of investors’ opinions, securities become overvalued. We show that discounts of single-country closed-end funds are related to overpricing of the securities in the foreign market due to Miller’s two conditions. Consistent with theoretical predictions, we find that either dispersion of investor opinions or short sale restrictions alone are not positively related to the discount. However, when both conditions exist simultaneously, the observed fund discounts are significantly larger.

Keywords: Short Sale Restrictions, Closed-End fund Discount, Investor Disagreement

JEL Classification: G14, G19

Suggested Citation

Sanning, Lee W. and Skiba, Alexandre and Skiba, Hilla, Short Sale Restrictions, Differences of Opinion, and Closed-End Fund Discount (November 12, 2010). Available at SSRN: https://ssrn.com/abstract=1709665 or http://dx.doi.org/10.2139/ssrn.1709665

Lee W. Sanning

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States
307-766-3848 (Phone)

Alexandre Skiba

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

Hilla Skiba (Contact Author)

Colorado State University ( email )

Fort Collins, CO 80523
United States
9704912205 (Phone)
9704912205 (Fax)