Closed-End Fund IPOs: Sold Not Bought

Abstract

Closed-end fund IPOs are priced above their net asset value due to the sales load paid to the underwriters. Within five months of the IPO, they start trading at a discount. Six months post-IPO, the average raw return is -4.75%, underperforming seasoned funds by 8.52%. An agency hypothesis is introduced to explain the negative raw and abnormal returns. I posit that full service brokers with access to retail investors create demand for CEF IPOs when the time-varying reputational cost is low. Intensive price support delays and obfuscates the subsequent price decline. In other words, CEF IPOs are sold, not bought.