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Organizational form and liquidity management: Evidence from open- vs. closed-end municipal bond funds

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  • Chalmers, John
  • Wang, Z. Jay
  • Yang, Jingyun

Abstract

This paper studies how the organizational forms of open- and closed-end funds affect their ability to manage illiquid assets. We use a sample of municipal bond funds from 2002 to 2015 to compare the portfolio liquidity and performance of open- and closed-end funds. We find that immunity to redemption risk allows closed-end funds to hold more illiquid municipal bonds than open-end funds, and they charge higher management fees for such liquidity provision. Closed-end funds earn liquidity premiums from their illiquid holdings. They significantly underperform peer open-end funds after controlling for their exposure to liquidity risk. Highly leveraged closed-end funds are subject to systematic liquidity risk. We find that closed-end funds with higher leverage hold more liquid municipal bonds. They trade more liquid municipal bonds to reduce the potential costs at forced deleverage.

Suggested Citation

  • Chalmers, John & Wang, Z. Jay & Yang, Jingyun, 2025. "Organizational form and liquidity management: Evidence from open- vs. closed-end municipal bond funds," Finance Research Letters, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:finlet:v:73:y:2025:i:c:s1544612324015289
    DOI: 10.1016/j.frl.2024.106499
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