Dividend Policy, Signaling, and Discounts on Closed-End Funds
Posted: 28 Aug 2011 Last revised: 18 Oct 2011
Date Written: 2006
We test the predictions of dividend signaling models using closed-end equity funds that adopt explicit policies committing them to pay minimum dividend yields. These policies represent deliberate attempts to reduce share price undervaluation relative to NAV. Funds that adopt minimum dividend policies experience reductions in their share price discounts, trade at smaller discounts than other funds, earn greater excess returns following policy adoption, and their managers survive longer than other managers do. The results are broadly consistent with the predictions of dividend signaling models, and suggest that high quality closed-end funds can reduce undervaluation via dividend policy.
Keywords: Dividend policy, Signaling, Closed-funds, Compensation
JEL Classification: G12, G35
Suggested Citation: Suggested Citation