Abstract
This paper offers a new explanation to the closed-end funds' puzzles. It is driven by two observations: the fact the closed-end fund is a public company with a guaranteed, long-term annual compensation for Fund's entrenched management; and the assumption (acceptable within classical rational-and-efficient-markets paradigm) that management adds value to assets-under-their-management. As a result, the value of the closed end fund's shares is an algebraic sum of assets-under-management plus the [capitalized] value-added by the management minus the [capitalized] value of the costs-of-management. This approach is rich enough to explain several of perceived puzzles, such as the persistence of discounts, relationship between a Fund's discount and its dividend policy, the zero correlation between discounts and interest rates, and the excess volatility of Fund's share price. It suggests a positive theory of the closed-end fund as an efficiency-driven organizational form of fund management. The paper's arguments are supported by our preliminary empirical study. The approach provides a number of empirically testable hypotheses.
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