What Drives Closed-End Fund Discounts? Evidence from COVID-19

50 Pages Posted: 1 Mar 2021 Last revised: 11 Aug 2021

See all articles by Liang Ma

Liang Ma

University of South Carolina - Darla Moore School of Business

Date Written: July 30, 2021

Abstract

By exploiting the exogenous COVID-19 shock, this paper attempts to shed light on the closed-end fund (CEF) discount puzzle. CEF discounts increased after COVID-19, and I identify a causal role of sentiment in this effect. I show that COVID-19 reduced individual investor sentiment. Using the difference-in-differences (DiD) approach, I find that CEFs with higher sentiment beta or higher retail ownership experienced a larger increase in discounts after the COVID-19 shock. The DiD results are unlikely to be driven by alternative channels such as the liquidity, expense, payout, and leverage channels. Overall, the results support the sentiment-based explanation of CEF discounts.

Keywords: Closed-End Funds, Discounts, COVID-19, Mispricing, Investor Sentiment

JEL Classification: G12, G14, G40

Suggested Citation

Ma, Liang, What Drives Closed-End Fund Discounts? Evidence from COVID-19 (July 30, 2021). Available at SSRN: https://ssrn.com/abstract=3793904 or http://dx.doi.org/10.2139/ssrn.3793904

Liang Ma (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

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