Equity closed‐end fund discounts and taxes

Abstract

AbstractAfter documenting CRSP errors in classifying the tax status of distributions, we make use of two important institutional features that the related literature has ignored: (i) tax rate changes and (ii) non‐taxable distributions. We find that taxable distributions lead to discount reductions, and the reduction is greater during high tax periods than during low tax periods. By contrast, non‐taxable distributions have no discernible impact on the discount, consistent with a tax‐based explanation. Importantly, we are able to rule out a competing short‐term trading hypothesis. Taken together, our results highlight the importance of personal taxes in explaining closed‐end fund discounts.