Understanding the Closed-end Fund Puzzle from the Chinese Experience

Although many characteristics of Chinese closed-end funds resemble those of the U.S. funds, investors and environment are different. For example, institutions such as insurance companies hold a substantial amount in closed-end funds, there are no capital gains taxes, and there is no private investment by the funds. These differences allow us find that the discounts are negatively related to liquidity, percentage of stock holdings, and past risk-adjusted performance. Discounts are also positively influenced by the R2 from a market model applied to the underlying asset returns, managerial ownership, and the size of the fund. We further show that “investor overconfidence” and liquidity are major factors that affect the dynamics of discounts