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Payout policies and closed-end fund discounts: Signaling, agency costs, and the role of institutional investors

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  • Jay Wang, Z.
  • Nanda, Vikram

Abstract

The adoption of a managed distribution policy or plan (MDP) by closed-end funds appears effective in dramatically reducing, even eliminating, fund discounts. We investigate two possible explanations: the signaling explanation proposed in the literature, that the MDP serves as a positive signal of future fund performance, and an alternative explanation based on agency costs. Our results indicate that signaling is, at best, only part of the explanation and that the evidence is generally more consistent with the agency cost hypothesis. For funds adopting aggressive payout targets of 10% (median target) and above, discounts tend to disappear, though there is no discernible improvement in NAV performance. Consistent with the agency cost hypothesis, it is often pressure from institutions/large shareholders that leads to the adoption of aggressive payout policies. Moreover, aggressive-MDPs are associated with a decrease in fund size and managerial fees. Suggestive of their activist role in MDP adoptions and/or informed trading, institutions - especially ones that are Value oriented - tend to build-up their holdings in a fund prior to the adoption of an aggressive-MDP, and liquidate their positions once the price rises.

Suggested Citation

  • Jay Wang, Z. & Nanda, Vikram, 2011. "Payout policies and closed-end fund discounts: Signaling, agency costs, and the role of institutional investors," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 589-619, October.
  • Handle: RePEc:eee:jfinin:v:20:y:2011:i:4:p:589-619
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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.
    2. Kim, Doseong & Kim, Yura & Song, Kyojik Roy, 2013. "Payout policies on U.S. closed-end funds," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 345-356.
    3. Yongchun Ju & Linying Zhao, 2014. "Directors’ Ownership and Closed-End Fund Discounts," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(2), pages 241-269, April.
    4. repec:eee:pacfin:v:46:y:2017:i:pb:p:269-291 is not listed on IDEAS
    5. Stylianos X. Koufadakis, 2016. "Mispricing Explanations of Closed-End Funds: A Survey Review," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(1-2), pages 108-135, January-J.
    6. Wu, Youchang & Wermers, Russ & Zechner, Josef, 2016. "Managerial rents vs. shareholder value in delegated portfolio management: The case of closed-end funds," CFS Working Paper Series 548, Center for Financial Studies (CFS).
    7. repec:kap:rqfnac:v:50:y:2018:i:2:d:10.1007_s11156-017-0634-0 is not listed on IDEAS

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