Dividend distributions and closed-end fund discounts
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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