Predictive Ability and Market Pricing of Fair Value Earnings Components for Closed-End Funds

50 Pages Posted: 3 Feb 2016 Last revised: 4 Jul 2017

See all articles by Igor Goncharov

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Daniel W. Collins

University of Iowa - Department of Accounting

Wei Chen

University of Connecticut

Date Written: July 4, 2017

Abstract

This study uses U.S. closed-end funds to investigate whether the realized component of fair value earnings conveys information about future fund and benchmark market performance and whether the market impounds this predictive information into fund share prices. We find that the realized gain/loss component of fair value earnings is strongly negatively related with future fund performance. This finding is consistent with two competing explanations for the fund managers’ trading behavior: the disposition effect behavioral bias hypothesis and the market timing hypothesis. Consistent with the market timing hypothesis, we find that the relative frequency of realized gains and the average magnitude of net realized gains in period t is higher (lower) conditional on benchmark market returns in t 1 being negative (positive). We find little evidence that fund managers’ asymmetric selling of winners versus losers is due to disposition effect behavioral biases. Market pricing tests reveal that investors in closed-end funds do not fully impound the signaling information about future fund performance and future benchmark returns that is conveyed by net realized gains/losses. Similar to historical cost earnings components, investors appear to focus on aggregate fair value earnings and fail to fully impound into fund share prices the signaling ability with respect to future earnings of the realized gain/loss component of fair value earnings.

Keywords: realized and unrealized gains/losses, closed-end funds, market timing, disposition effect, pricing of fair value earnings components

JEL Classification: M41, G11, G14

Suggested Citation

Goncharov, Igor and Collins, Daniel W. and Chen, Wei, Predictive Ability and Market Pricing of Fair Value Earnings Components for Closed-End Funds (July 4, 2017). Available at SSRN: https://ssrn.com/abstract=2726053 or http://dx.doi.org/10.2139/ssrn.2726053

Igor Goncharov (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Wei Chen

University of Connecticut ( email )

Department of Accounting
Storrs, CT 06269
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
247
Abstract Views
1,002
rank
145,052
PlumX Metrics