Abstract
Closed-end funds represent an ideal vehicle for studying the possibility of mispricing in financial markets. Despite substantial previous research, much remains to be learned about why closed-end funds consistently sell at values other than their net asset value. This study investigates nine potential explanations of the discounts on closed-end equity funds. These explanations include dividend yield, discount volatility, tax-trading opportunities, unrealized capital appreciation, managerial performance, managerial expense ratios, portfolio turnover, volume, and block ownership. Test results show significant support for the theory that the size of the discount may be due to investors seeking compensation for dividend-related tax costs. There is also strong support for a positive relationship between the size of the discount and the risk associated with the discount variance. The third significant result concerns the ability of block-holders to either participate in improper trading of fund shares or to protect small investors from improper fund trading.
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