Closed-End Fund Puzzles and Value of Fund Manager's Private Information

This paper presents a theoretical model of closed- end fund pricing within a multi-period framework in which the fee charged by the fund manager and investors expectation on the fund manager's future performance can explain some of the puzzles associated with closed-end fund prices. Closed-end fund can be regarded as a financial intermediary through which uninformed but rational traders invest in risky securities with the help of an informed fund manager. This paper shows that i) the closed-end fund starts at a premium but it is more likely to sell at discount at later periods, ii) the price and discount of closed-end fund are subject to greater fluctuation than the price of assets invested by the fund, and iii) liquidation decision depends on the size of discount as well as the cost associated with it.