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Dividend distributions and closed-end fund discounts

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  • Day, Theodore E.
  • Li, George Z.
  • Xu, Yexiao
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    Abstract

    Empirical support for the hypothesis that closed-end fund discounts are related to overhanging tax liabilities has been mixed. We introduce a new approach to testing this hypothesis by examining changes in discount levels following distributions of dividends and capital gains. Since distributions reduce future shareholder tax liabilities, the tax liability hypothesis implies that closed-end fund discounts should decline following distributions. Focusing on changes in discounts isolates this tax effect by eliminating the impact of other fund-specific factors on discount levels. Our results support the tax liability hypothesis, showing that short-run fluctuations in discounts are directly affected by taxable distributions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 100 (2011)
    Issue (Month): 3 (June)
    Pages: 579-593

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    Handle: RePEc:eee:jfinec:v:100:y:2011:i:3:p:579-593

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Closed-end funds Discounts Tax capitalization Unrealized capital gains;

    References

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    1. Brauer, Greggory A & Chang, Eric C, 1990. "Return Seasonality in Stocks and Their Underlying Assets: Tax-Loss Selling versus Information Explanations," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 255-80.
    2. Brickley, James A & Manaster, Steven & Schallheim, James, 1991. "The Tax-Timing Option and the Discounts on Closed-End Investment Companies," The Journal of Business, University of Chicago Press, vol. 64(3), pages 287-312, July.
    3. Pontiff, Jeffrey, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1135-51, November.
    4. J. B. Chay & Dosoung Choi & Jeffrey Pontiff, 2006. "Market Valuation of Tax-Timing Options: Evidence from Capital Gains Distributions," Journal of Finance, American Finance Association, vol. 61(2), pages 837-865, 04.
    5. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, vol. 87(1), pages 155-69, March.
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