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Closed-End Fund IPOs: Sold, Not Bought

Author

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  • Shao, Diana
  • Ritter, Jay R.

Abstract

Closed-end fund (CEF) initial public offerings (IPOs) are priced above their net asset value due to the sales load paid to the underwriters. Within five months of the IPO, the CEFs start trading at a discount. By six months post-IPO, the average raw return is −4.75%, underperforming seasoned funds by 8.52%. We explain how data mistakes in Cherkes et al. (2009 RFS) lead them to find much less underperformance than we document. We propose an agency hypothesis to explain the creation of CEFs despite these negative returns. We posit that full-service brokers/investment advisors create demand for CEF IPOs among their retail clients when the time-varying reputational cost is low. Intensive price support delays and obfuscates the subsequent price decline. In other words, CEF IPOs are sold, not bought.

Suggested Citation

  • Shao, Diana & Ritter, Jay R., 2018. "Closed-End Fund IPOs: Sold, Not Bought," Critical Finance Review, now publishers, vol. 7(2), pages 201-240, December.
    • Handle: RePEc:now:jnlcfr:104.00000065
    DOI: 10.1561/104.00000065
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    Cited by:

    1. Hwang, Joon Ho & Kim, Joohwan & Park, Jinwoo, 2021. "Underwriters’ price support regulation and institutional investors’ trading: The case of the putback option," Research in International Business and Finance, Elsevier, vol. 57(C).
    2. Liang Ma, 2024. "What drives closed‐end fund discounts? Evidence from COVID‐19," Financial Management, Financial Management Association International, vol. 53(1), pages 119-143, March.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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