NAV discount analysis using the appraisal reduction

This work is aimed at explaining the closed-end fund puzzle using the ìrationalî or funda-mental approach on a sample of tax-privileged real estate companies. NAV discounts in UK REITs and French SIICs over a five-year period is analyzed in order to find its drivers also us-ing a new methodologies. After a traditional approach testing seven independent variables over four model specifications, the ungeared discount formula is used in order to take in ac-count bias in the way the traditional discount is computed. Eventually, a new approach based on the ìappraisal reductionî considers investor sentiment by reducing appraisals be-fore NAV calculation. By eliminating the market sentiment, it is possible to better identify firm-specific factors that capture their sole contribution to the NAV discount explanation. Results show that there is indeed a change in the relationship between leverage and NAV discount. Moreover, liquidity and performance are not always significant, management re-muneration and investment activity are perceived similarly in France and in the UK while size has a different effect in the two markets.