Signaling or Marketing? The Role of Discount Control Mechanisms in Closed-End Funds

Abstract

The discount control mechanisms that closed-end funds often choose to adopt before IPO are supposedly implemented to narrow the difference between share price and net asset value. The two discount control mechanisms are mandatory continuation votes facilitating subsequent fund liquidation and overt statements that managers may repurchase shares based on the fund discount. We find no evidence that these two policies serve as costly signals of information. Funds with mandatory voting are not more likely to delist than other funds. Similarly, funds that explicitly discuss share repurchases do not repurchase shares more frequently in general or specifically when the discount is high. Moreover, the discount at IPO and the risk-adjusted performance for funds with these mechanisms is virtually identical to other funds. Instead, these policies appear to be marketing tools that convince investors to purchase more shares with no differential benefits.