Directors’ Ownership and Closed-End Fund Discounts

Abstract

This paper investigates whether ownership by independent directors could provide them with effective monitoring incentives and thus help reduce discounts in the closed-end fund industry. We find that after controlling for fund observed and unobserved characteristics with the latter proxied by fund fixed effects, independent directors’ ownership is negatively related to fund discounts. We further find that funds whose independent directors have larger ownership are more likely to employ appropriate measures to reduce fund discounts, such as buying back outstanding shares, adopting managed distribution plans (MDPs) if they do not have such plans in place, or increasing the minimum payout targets under their existing MDPs. These findings may imply that independent directors become better monitors when they have larger ownership in the funds they oversee and are thus more diligent in taking actions to diminish discounts.