Discounts and Termination of Close-end Funds
Abstract
Read thesis at https://ink.library.smu.edu.sg/etd_coll/235. Based on an extensive sample of U.S. closed end funds undergoing termination, this study offers a comprehensive analysis of closed end fund exiting behaviors. There are four ways for a fund to exit: merger into other closed-end fund, liquidation, conversion to open-end mutual fund and merger into open-end mutual fund. Closed-end funds that exit must choose the most efficient and optimal mechanisms corresponding to funds‟ characteristics and organizational forms. In this study, I find that closed-end funds exit optimally. First, funds with persistently larger discount and smaller size are more likely to exit and consistent with rational expectation, market incorporates open ending expectation into price/discount of closed-end funds. Discount level gradually adjusts to industry average before open ending, especially for liquidating funds; closed-end funds which are open-ended have larger discounts, larger cumulative abnormal returns CARs (t-1, t, t+1) and more significant relationships between CARs (t-1, t, t+1) and discounts than funds which are close-ended. Second, discount is not systematically predictive of liquidation probability; both merged funds and acquiring funds experience similar level of discount and the coefficients of discount for acquiring funds are not significantly different from that of merged funds. Third, dividend is negatively related with open ending but positively with closed ending; funds with high dividend yield are more likely to be acquired by other closed-end funds and less likely to liquidate or convert to mutual.