Abstract
This paper offers a positive theory of closed-end funds. It views them as an organizational innovation designed to serve clienteles of small investors with long holding periods and large transaction costs. Closed-end funds economize on transaction costs while investing safely in the most illiquid assets. The closing of assets generates managerial tenure and, thus, a new allocation of property rights on the fund’s assets. The fund’s premium equals to the (capitalized) value added by clientele service minus the (capitalized) value of the costs of management. The capitalized value of clientele service changes with the market-wide liquidity premium. This approach is rich enough to explain the persistence of discounts, the relationship between a fund’s discount and its dividend policy, the zero correlation between discounts and interest rates, and the excess volatility of a fund’s share price. The paper’s arguments are supported by a preliminary empirical study.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
