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Activist Arbitrage, Lifeboats, and Closed-End Funds

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  • Stephen L. Lenkey

Abstract

We present a dynamic rational expectations model of closed-end fund discounts that incorporates feedback effects from activist arbitrage and lifeboats. Both activist arbitrage and lifeboats distort closed-end fund prices and lead to narrower discounts. Furthermore, both activist arbitrage and lifeboats effectuate an ex post wealth transfer from managers to investors but an ex ante wealth transfer from low-ability managers to high-ability managers. On average, investor wealth is unaffected by either activist arbitrage or lifeboats because their potential benefits are factored into higher fund prices. Although lifeboats can reduce takeover attempts, they do not increase expected managerial wealth.

Suggested Citation

  • Stephen L. Lenkey, 2014. "Activist Arbitrage, Lifeboats, and Closed-End Funds," Review of Finance, European Finance Association, vol. 18(1), pages 271-320.
    • Handle: RePEc:oup:revfin:v:18:y:2014:i:1:p:271-320.
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    File URL: http://hdl.handle.net/10.1093/rof/rfs052
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    Cited by:

    1. Lenkey, Stephen L., 2015. "The closed-end fund puzzle: Management fees and private information," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 112-129.

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