Many scholars have put forward various models of closed-end fund discount to explain the reasons for closed-end fund discount, such as agency theory, market segmentation theory and investor sentiment theory. For how to eliminate the discount of closed-end funds, practitioners have put forward various solutions, such as turning closed to open, fund liquidation in advance, fund tender offer, fund share repurchase, fund management and distribution.
First, the theoretical explanation of closed-end fund discount
According to the research of Lee, Shleifer and Thaler( 199 1), the mystery of fund discount is mainly reflected in four aspects: first, the phenomenon of closed-end fund discount trading is inconsistent with market efficiency; Second, the discount level is time-varying, that is, it changes with time; Third, although closed-end funds have discount transactions, why is the fund IPO still a premium transaction? Fourth, if closed to open or liquidation, why the discount rate will be greatly reduced. Since Pratt( 1966) first gave a theoretical explanation for closed-end funds, many financial scholars have put forward many explanations for the phenomenon of closed-end funds discount, which can be roughly divided into two categories: the first category is classical economic explanation. The basic framework of this explanation is based on the hypothesis of efficient market, and the phenomenon of closed-end fund discount trading is explained from the violation of market friction on the market. For example, agency cost hypothesis, market segmentation hypothesis and tax burden factor hypothesis. The second category is behavioral finance explanation. This category mainly explains the closed-end fund discount transaction based on the irrationality of investors. For example, investor sentiment hypothesis, noise trading hypothesis and so on.
(A), the interpretation of behavioral finance
1, noise trading
Delong, Shriver, Summers and Valdman (1990) put forward noise trading. DSSW( 1990) establishes a noise trading model including rational investors and irrational (noisy) investors. They believe that rational investors are risk-averse and take actions mainly according to the changes of basic factors, while irrational investors only have some information, and they often behave irrationally in transactions, so that in a market dominated by irrational investors, asset prices may deviate from equilibrium prices for a long time. Because the trading behavior of irrational investors is unpredictable, rational investors dare not take active trading strategies in the game with noise investors, and only when they think that the discount rate is low enough to make up for the risk of noise trading will they carry out arbitrage trading.
2. Investor sentiment theory.
Lee, Shleifer and Thaler( 199 1) further put forward the theory of "investor sentiment" from the DSSW model. Based on the fact that American closed-end funds are mainly held by individual investors, LST believes that the change of discount rate comes from the fluctuation of individual investors' mood, and claims that the theory of investor's mood fluctuation can solve most discount problems. It is believed that the correlation between the higher discount rate of closed-end funds and the weighted discount rate of closed-end funds in the United States and the return rate of small American companies (most of which are also individual investors) can support his theory, but Chen, Kan and Miller (1993) and brower (1993) questioned his argument. They think there is no effective connection between the discount rate of closed-end funds and the high price of small companies. In addition, Michael(2000) takes closed-end funds in Britain as an example, and thinks that even in a market with a high degree of institutional investors' participation, the discount of closed-end funds is still greatly influenced by investors' emotions.
(B) the interpretation of classical economics
1, net deviation theory
Description of closed-end fund discount transaction; The net value of the fund may be overestimated. The main factors that lead to the overvaluation of fund net value are tax factors and asset liquidity. American Investment Company Law 1940 requires that more than 90% of the income realized by the fund must be distributed to investors. Because western countries, mainly the United States, have capital gains tax, closed-end funds with large unrealized capital gains mean that investors will bear higher tax burden, and discount becomes a reasonable reflection of this factor. If the fund has a large number of illiquid assets, then the net value of the fund will also exceed its true value; Because the fund can't be realized immediately before the stock price falls. Therefore, the liquidity of assets also constitutes a factor of fund discount.
2. Agency cost hypothesis.
Zhan Sen and meckling first explained the discount phenomenon of closed-end funds from the perspective of agency cost. Agency cost explains the discount phenomenon from the perspective of high operating cost and fund performance, and the discount of closed-end fund reflects the present value of fund management cost exceeding the future performance growth of fund. The typical agency cost hypothesis holds that the higher the fund expense rate, the greater the discount rate of the fund. However, malkiel (1977, 1995) found that agency cost does not necessarily lead to discount, and discount mainly depends on whether the management cost of the fund will exceed the future performance growth of the fund. Through the study of closed-end funds in the United States, it is found that there is no correlation between fund discount rate and fund management fee. According to the agency cost hypothesis, the poor performance of the fund will lead to a large discount rate, and the fund with a high discount rate also means that the future performance of the fund will be poor. However, Lee, Shleifer and Thaler( 199 1) found that the discount rate of the fund has nothing to do with the performance of the fund, and the fund with large discount rate usually performs better than the fund with low discount rate.
3. Market segmentation hypothesis
Market segmentation hypothesis holds that various market segments may be the reason for closed-end fund discount trading. Pratt (1966) and malkiel? Firstenberg( 1978) thinks that compared with open-end funds, closed-end funds have to trade at a discount because of the lack of promotion and the lack of public awareness and understanding. The market segmentation hypothesis can be explained from two angles, one is the international market segmentation, and the other is the domestic market segmentation. Malkiel (1977), Bunser-Neil, brower, Neil and whitley (1990), Haduweilis, laporta and Vitman (1994), Chen, En and Kolodny (1995). Chung(2000) and Patro(200 1) tested the hypothesis of international market segmentation with supporting and contradictory evidence. Malkiel (1977), Anderson (1984) and Arnold (1983) respectively tested the domestic market segmentation hypothesis, and found no unified evidence.
In addition to the above three representative explanations, there are some other explanations, such as scale factors and dividend factors, but these explanations based on traditional finance can not completely solve the mystery of closed-end fund discount. Since 1990s, behavioral finance has broken through the rational financial hypothesis and put forward a new explanation of closed-end fund discount.
Second, the enlightenment of closed-end fund discount trading
With the formal implementation of the Securities Investment Fund Law on June 1 and the approval of the l of scheme of Shenzhen Stock Exchange by the CSRC, the technical obstacles to solve the discount transaction of closed-end funds in China no longer exist, and whether the closed-end funds adopt the open or repurchase scheme in the future will mean huge investment opportunities. As of June 25th, the average discount rate of 54 domestic closed-end funds has reached 25.2 1%. At the same time, 20 small and medium-sized funds will expire in the next three years. Foreign theoretical and practical experience fully shows that the discount rate of closed-end funds will be greatly reduced as the maturity date approaches. Therefore, the huge investment opportunities behind the high discount of closed-end funds in China are obvious. From the specific investment strategy, investors can pay attention to the funds that may be "closed to open" in the near future. At the same time, we can also pay attention to closed-end funds with high discount rate, good historical performance and relatively short duration.