Payout policies on U.S. closed-end funds

Abstract

This paper investigates the impact of adopting a minimum dividend policy (MDP) or a share repurchase program (SRP) on closed-end fund discounts and the difference of the two payout policies. Using the data from the U.S. equity funds, we find that funds adopting an MDP significantly reduce their discounts at the announcements of the policy, but funds adopting an SRP do not. We also find that funds with an MDP earn higher NAV (net asset value) returns than the market during one or three years after the adoption, whereas funds with an SRP do not. After controlling for other determinants, we document that the funds with an MDP trade at lower discounts than other funds without any payout policy, while the funds with an SRP trade at higher discounts. These findings are broadly consistent with the signaling argument. However, the discount reductions for MDP funds are not explained by changes in agency costs measured by fund size and expense ratios.