Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-04T17:42:25.176Z Has data issue: false hasContentIssue false
  • English
  • Français

Managed Distribution Policies in Closed-End Funds and Shareholder Activism

Published online by Cambridge University Press:  08 April 2015

Martin Cherkes ,
Jacob S. Sagi  and
Z. Jay Wang
Martin Cherkes
Affiliation:
[email protected], Stern School of Business, New York University, 44 W 4th St, New York, NY 10012
Jacob S. Sagi
Affiliation:
[email protected], Kenan-Flagler Business School, University of North Carolina at Chapel Hill, CB 3490, Chapel Hill, NC 27599
Z. Jay Wang
Affiliation:
[email protected], Lundquist College of Business, University of Oregon, 1208 University of Oregon, Eugene, OR 97403.
Get access Rights & Permissions [Opens in a new window]

Abstract

In closed-end funds, a managed distribution policy (MDP) is a dividend commitment potentially requiring the liquidation of assets. We argue that MDPs lower managerial claims on fund assets and, when the fund is at a discount, increase shareholder value. This transfer of wealth can be rationalized by managers wishing to deter a challenge from activist shareholders through a costly proxy vote. We find strong empirical evidence that managers respond to the presence of activists using MDPs, that MDPs constitute an effective wealth transfer to shareholders, and that activists are less likely to challenge management when an MDP is in place.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 5-6 , December 2014 , pp. 1311 - 1337
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.Google Scholar
An, J.; Gemmill, G.; and Thomas, D.. “The Agency Effect of Repurchases on Closed-End Funds.” European Financial Management, 18 (2012), 240–270.Google Scholar
Baker, M., and Wurgler, J.. “A Catering Theory of Dividends.” Journal of Finance, 59 (2004), 1125–1165.Google Scholar
Berk, J., and Green, R.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.CrossRefGoogle Scholar
Berk, J., and Stanton, R.. “Managerial Ability, Compensation, and the Closed-End Fund Discount.” Journal of Finance, 62 (2007), 529–556.Google Scholar
Bradley, M.; Brav, A.; Goldstein, I.; and Jiang, W.. “Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds.” Journal of Financial Economics, 95 (2010), 1–19.Google Scholar
Brav, A.; Jiang, W.; and Kim, H.. “Hedge Fund Activism: A Review.” Foundations and Trends in Finance, 4 (2010), 185–246.Google Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chay, J. B.; Song, K. R.; and Kim, D.. “Minimum Dividend Policy vs. Share Repurchase on Closed-End Funds.” Working Paper, Sungkyunkwan University (2010).Google Scholar
Cherkes, M.; Sagi, J. S.; and Stanton, R.. “A Liquidity-Based Theory of Closed-End Funds.” Review of Financial Studies, 22 (2009), 257–297.Google Scholar
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The Impact of Prices on Takeovers.” Journal of Finance, 67 (2011), 933–972.CrossRefGoogle Scholar
Getmansky, M.; Lo, A.; and Makarov, I.. “An Econometric Model of Serial Correlation and Illiquidity in Hedge-Fund Returns.” Journal of Financial Economics, 74 (2004), 1054–1090.Google Scholar
Gillan, S. L., and Starks, L. T.. “The Evolution of Shareholder Activism in the United States.” Journal of Applied Corporate Finance, 19 (2007), 55–73.CrossRefGoogle Scholar
Graham, J. R., and Kumar, A.. “Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors.” Journal of Finance, 61 (2006), 1305–1336.Google Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jiang, W.; Li, K.; and Wang, W.. “Hedge Funds and Chapter 11.” Journal of Finance, 67 (2012), 513–560.Google Scholar
Johnson, S.; Lin, J. C.; and Song, K.. “Dividend Policy, Signaling, and Discounts on Closed-End Funds.” Journal of Financial Economics, 81 (2006), 539–562.CrossRefGoogle Scholar
Malkiel, B. G. “The Valuation of Closed-End Investment-Company Shares.” Journal of Finance, 32 (1977), 847–859.Google Scholar
Miller, M., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.Google Scholar
Modigliani, F., and Miller, M.. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Pontiff, J. “Costly Arbitrage: Evidence from Closed-End Funds.” Quarterly Journal of Economics, 111 (1996), 1135–1151.CrossRefGoogle Scholar
Pontiff, J. “Costly Arbitrage and the Myth of Idiosyncratic Risk.” Journal of Accounting and Economics, 42 (2006), 35–52.Google Scholar
Porter, G.; Roenfeldt, R.; and Sicherman, N.. “The Value of Open Market Repurchases of Closed-End Fund Shares.” Journal of Business, 72 (1999), 257–276.Google Scholar
Ramadorai, T. “The Secondary Market for Hedge Funds and the Closed-Hedge Fund Premium.” Journal of Finance, 67 (2012), 479–512.Google Scholar
Ross, S. “Neoclassical Finance, Alternative Finance and the Closed End Fund Puzzle.” European Financial Management, 8 (2002), 129–137.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “Large Shareholders and Corporate Control.” Journal of Political Economy, 94 (1986), 461–488.Google Scholar
Wang, Z. J., and Nanda, V.. “Payout Policies and Closed-End Fund Discounts: Signaling, Agency Costs, and the Role of Institutional Investors.” Journal of Financial Intermediation, 20 (2011), 589–619.Google Scholar
Supplementary material: PDF

Cherkes supplementary material

Online Appendix A-I

Download Cherkes supplementary material(PDF)
PDF 308.8 KB