Abstract
Empirical support for the hypothesis that closed-end fund discounts are related to overhanging tax liabilities has been mixed. We test this hypothesis using a new approach that examines changes in discount levels following distributions of dividends and capital gain. Since such distributions reduce future shareholder tax liabilities, the tax liability hypothesis implies that closed-end fund discounts should decline following distributions. By focusing on changes in discount levels, we control for the impact of other fund specific factors on discount levels. Our results support the tax liability hypothesis, showing that a significant portion of the discount changes around distributions is associated with tax liabilities.
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