Earnings Opacity and Closed-End Country Fund Discounts

48 Pages Posted: 28 Jul 2012 Last revised: 12 Feb 2016

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Qingyuan Li

Wuhan University - School of Economics and Management

Xin Wang

The University of Hong Kong

Date Written: February 12, 2016

Abstract

Closed-end country funds are interesting in that they have two sets of prices for the same underlying assets – the net asset value (NAV) of the fund holdings as measured using the underlying firms’ stock prices in their home markets and the fund price at which the fund trades on a U.S. stock exchange. Utilizing the theoretical framework of information asymmetry in two separate markets for an identical asset, we find that the difference between the fund’s NAV and its trading price (i.e., the fund discount) is positively associated with the earnings opacity of the underlying companies. Such a positive association is consistent with the notion that U.S. investors face higher information acquisition and processing costs when compared with local investors and therefore earnings opacity exacerbates the information disadvantage of U.S. investors, leading to a larger fund discount. We further show that the positive relation varies predictably with U.S. investors’ information acquisition and processing costs and with the extent to which host stock markets are segmented from the U.S. market. Specifically, we find that the positive relation between earnings opacity and fund discounts is weaker for those funds with more U.S. cross-listings in fund holdings, with underlying companies following financial reporting standards similar to U.S. standards, and with less segmented local markets.

Keywords: Closed-end country funds, fund discounts, earnings opacity, information acquisition and processing, international

JEL Classification: F30, G12, G15, G30, G34, M41

Suggested Citation

Chen, Feng and Hope, Ole-Kristian and Li, Qingyuan and Wang, Xin, Earnings Opacity and Closed-End Country Fund Discounts (February 12, 2016). Available at SSRN: https://ssrn.com/abstract=2118617 or http://dx.doi.org/10.2139/ssrn.2118617

Feng Chen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Qingyuan Li

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Xin Wang

The University of Hong Kong ( email )

1215 K.K.Leung Building
Hong Kong
Hong Kong

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