Closed-end bond fund discounts: Agency costs, investor sentiment and portfolio content

Abstract

A sample of closed-end bond funds is examined to investigate several hypotheses purporting to explain closed-end fund discounts. Consistent with Brickley, Manaster and Schallheim (1991), unrealized capital appreciation is found to be negatively related to the discount. Support also is found for the investor sentiment hypothesis of Lee, Shleifer, and Thaler (1991). Fund expense, a proxy for agency-related issues, and holdings of foreign securities, are found to be positively related to the discount. Two proxies for the investor allocation decision: the slope of the yield curve, and differential returns between stocks and bonds, are significant in the directions expected. No significant relationships are found between investments in either restricted securities or large outside blockholdings and the discount.