The Post-Offering Price Performance of Closed-End Funds

Abstract

0 The pricing of closed-end funds has intrigued investors, policymakers, and economists since the late 1920s, when these securities grew at a remarkable pace. Unlike open-end funds which continually offer new shares to the investing public, closed-end funds fix the total number of shares outstanding at the initial public offering (IPO). While investors in an open-end fund may redeem their shares directly to the mutual fund at net asset value (NAV), holders of closed-end funds buy and sell their shares in the open market. Since the share value of a closed-end fund is determined by the price in the stock market, investors have no guarantee that the shares will be worth the underlying net asset value. Researchers have been especially interested in the fact that many funds trade at a significant discount from NAV. Although several studies have examined the existence of discounts and premiums in closed-end funds, the pricing of these securities remains puzzling.1 A recent resurgence in IPOs of closed-end funds has refocused attention on these securities. In particular, both the business press and academic researchers note anomalies in the aftermarket price performance of closed-end funds shares.2