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.
Closed-End Fund IPOs: Sold, Not Bought
We are grateful to three anonymous referees, Martin Cherkes, Francesca Cornelli, Kathleen Hanley, Leming Lin, Xiaoding Liu, Andy Naranjo, Lorenzo Naranjo, Mahendrarajah (Nimal) Nimalendran, Jacob Sagi, Matthew Souther, Donghang Zhang, and seminar participants at the Ohio University, Oregon State University, the University of Florida, the 2015 Florida Finance Conference at the University of South Florida, and the 2016 FMA meetings for their valuable suggestions. All errors are our own.
Shao D, Ritter JR (2018), "Closed-End Fund IPOs: Sold, Not Bought". Critical Finance Review, Vol. 7 No. 2 pp. 201–240, doi: https://doi.org/10.1561/104.00000065
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