Market segmentation and the valuation of closed-end country funds: An empirical analysis

This article examines the role of market segmentation on the valuation of the U.S. stock exchange-listed closed-end country funds and analyzes the determinants of net fund premia in a multivariate context. It is shown that fund returns are generally sensitive to both national and U.S. market factors, but only national factors are priced. Cross-section and time series estimation of net fund premia indicates the importance of market segmentation as a determinant of net fund premia. There is some evidence that exchange rate changes may exert an additional influence. However, market expectation variables such as economic growth of the country or relative capitalization rates are insignificant.     

The short-term impact of director trading in UK closed-end funds

Most closed-end funds are transparent entities that hold securities that are actively traded in liquid markets. In such a setting, the argument that director transactions mitigate information asymmetry has very limited applicability. Our results provide support for the theory of Barber and Odean [2008. “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies 21: 785–818]: retail investor decision-making is influenced by attention-grabbing events. Director purchases are one such attention-grabbing event and are associated with significant positive price returns – the magnitudes of which are linked to the size of the purchase, the size of the fund, and the investment mandate. Trading volumes increase at the time of the purchase but most of the initial price responses and trading volumes dissipate over the following 15 days.     

Optimal allocation to hedge funds: an empirical analysis

What percentage of their portfolio should investors allocate to hedge funds? The only available answers to the above question are set in a static mean-variance framework, with no explicit accounting for uncertainty on the active manager's ability to generate abnormal return, and usually generate unreasonably high allocations to hedge funds. In this paper, we apply the model introduced in Cvitanic et al (2002b Working Paper USC) for optimal investment strategies in the presence of uncertain abnormal returns to a database of hedge funds. We find that the presence of the model risk significantly decreases an investor's optimal allocation to hedge funds. Another finding of this paper is that low beta hedge funds may serve as natural substitutes for a significant portion of investor risk-free asset holdings.     

An examination of the benefits of dynamic trading strategies in U.K. closed-end funds

We examine the after-cost out-of-sample performance of the unconditional mean–variance (UMV) strategy in the presence of conditioning information (Ferson and Siegel (2001)) using portfolios of U.K. equity closed-end funds. We find that the performance of the UMV strategy significantly improves when using lagged information variables with the highest persistence (first-order autocorrelation) levels and reduces turnover. This strategy is able to outperform alternative dynamic trading strategies and performs well across different subperiods. At low levels of trading costs, the UMV strategy is able to deliver significant value added to investors.     

Returns on initial public offerings of closed-end funds

Examination of 41 closed-end fund initial public offerings (IPOs)during the period from January 1986 to June 1987 reveals thatthe mean initial day's return is not significantly differentfrom zero in contrast to previous findings for nonfund IPOs.New funds also show significant negative after-market returnsunlike other new issues. Despite the disparity between our findingsand previous results, our results are consistent with existingmodels.     

The information content of closed-end country fund discounts

This paper examines whether premiums and discounts on closed-end country mutual funds (CECFs) contain useful information about future returns. We find that higher CECF premiums are associated both with higher future returns on the relevant foreign market index and with higher future NAV returns after controlling for the foreign market return. CECFs trading at large discounts are not necessarily bargains, because their future NAV performance can be expected to be relatively poor.     

An empirical examination of the diversification benefits of U.K. international equity closed-end funds

I use the Bayesian approach of Wang (1998) to examine the diversification benefits of international equity U.K. closed-end funds (CEF) in the presence of market frictions. No short selling constraints substantially reduce, and in some cases eliminate the diversification benefits of CEF. However, adjusting for higher trading costs in the benchmark assets, the diversification benefits of the funds are significant. The paper also finds that when comparing to the international equity exchange-traded funds (ETF), that both groups of funds are necessary to maximize the benefits of international diversification.     

WEBS,SPDRs, and country funds: an analysis of international cointegration

Prior empirical studies analyzing linkages between international equity markets have suffered because suitable real-world financial instruments representing national equity markets were not available for trading. In March 1996, World Equity Benchmark Shares (WEBS) began trading on the American Stock Exchange. WEBS are open-end index funds that trade like closed-end index funds; they are designed to closely track the international indices developed by Morgan Stanley Capital International. This study utilizes WEBS along with Standard & Poor’s Depository Receipts (SPDRs) to avoid the previously encountered problems associated with nonsynchronous trading, fluctuating foreign exchange rates, non-liquidity, trading restrictions, and index replication. Results indicate that substantial pairwise cointegration exists among the 18 market indices as well as between individual closed-end country funds and their own-country WEBS. In addition, Granger causality tests indicate the existence of short-term causal relationships, suggesting market inefficiencies and the possibility of short-run arbitrage opportunities.     

An analysis of closed-end funds discounts viewed from a lack of redemption perspective

We examine the behavior of discounts for an extensive sample of U.S. closed-end funds (CEF) undergoing open-ending. Share prices increase and discounts reduce at the time of announcement. The 2-day abnormal return is approximately one half of the pre-announcement discount. We test and find support for the investor sentiment, transaction costs, and portfolio liquidity hypotheses controlling for fund characteristics, tax liability, and dividends yield. The role of investor sentiment declines following the announcement. We decompose the pre-announcement discount into its structural and idiosyncratic parts, and find that there is a greater reduction of the idiosyncratic part of the discount at the time of announcement. The correlation between discount of CEF undergoing open-ending and that of an index of similar funds declines as the CEF nears open-ending.     

Activist arbitrage: A study of open-ending attempts of closed-end funds

This paper documents frequent attempts by activist arbitrageurs to open-end discounted closed-end funds, particularly after the 1992 proxy reform which reduced the costs of communication among shareholders. Open-ending attempts have a substantial effect on discounts, reducing them, on average, to half of their original level. The size of the discount is a major determinant of whether a fund gets attacked. Other important factors include the costs of communication among shareholders and the governance structure of the targeted fund. Our study contributes to the understanding of the actions undertaken by arbitrageurs in financial markets beyond just pure trading.     

An empirical analysis of Mexican and US closed-end mutual fund IPOs

We examine 135 Mexican closed-end fund IPOs and 370 Mexican non-fund IPOs that issued between 1994 and 2003 along with 217 contemporaneous US fund IPOs and document three primary results. First, we find that Mexican IPOs in the aggregate experience no significant underpricing, unlike their US IPO counterparts. Both Mexican and US IPOs experience significantly negative long-run performance. Second, Mexican closed-end fund IPOs experience positive long-run performance, significantly better than Mexican non-fund IPOs which experience negative long-run performance. Unlike Mexican fund IPOs, US fund IPOs experience negative long-run performance. Third, we find that both Mexican and US debt-backed closed-end fund IPOs significantly outperform equity-backed closed-end IPOs. In Mexico, debt-backed funds experience positive abnormal returns, compared to negative abnormal returns for Mexican equity-backed funds, US debt-backed funds, and US equity-backed funds.     

The performance of enhanced-return index funds: evidence from bootstrap analysis

We apply the bootstrap technique proposed by Kosowski et al. [J. Finance, 2006, 61, 2551–2595] in conjunction with Carhart's [J. Finance, 1997, 52, 57–82] unconditional and Ferson and Schadt's [J. Finance, 1996, 51, 425–461] conditional four-factor models of performance to examine whether the performances of enhanced-return index funds over the 1996 to 2007 period are based on luck or superior ‘enhancing’ skills. The advantages of using the bootstrap to rank fund performance are many. It eliminates the need to specify the exact shape of the distribution from which returns are drawn and does not require estimating correlations between portfolio returns. It also eliminates the need to explicitly control for potential ‘data snooping’ biases that arise from an ex-post sort. Our results show evidence of enhanced-return index funds with positive and significant alphas after controlling for luck and sampling variability. The results are robust to both stock-only and derivative-enhanced index funds, although the spread of cross-sectional alphas for derivative-enhanced funds is slightly more pronounced. The study also examines various sub-periods within the sample horizon.     

The Italian hedge funds industry: An empirical analysis of performance and persistence

This study analyses Italian hedge funds performance and persistence. The peculiarity of the Italian hedge fund industry is that 95% of the hedge funds are funds of hedge funds (FoHF), whereas only 5% of them employ other investment styles. Using monthly data on FoHF provided by MondoHedge, we examine the impact of both market variables and funds’ own characteristics on funds performance using panel data. We find that the European, the Japanese and the emerging markets equity markets, and the commodity market have a positive impact on Italian FoHF performances, while the US Bond Market negatively affects them. Moreover, we find performance fees and notice days to have a negative impact on funds performances. Finally, we test the presence of performance persistence. Employing two different nonparametric methods, we find that funds performances are persistent on a monthly and quarterly basis, while the regression-based parametric method provides evidence of persistence only on a monthly basis.     

Applying developed‐country regulation in emerging markets: an analysis of Thai insider trading

This paper undertakes an out‐of‐sample test of developed‐country insider trading regulation in an emerging market environment (Thailand), where severe information asymmetry, lax enforcement and poor pricing efficiency are endemic. Thai insider trading regulation, which mimics developed market rules, fails on all three measures of success. Insiders trade with impunity during a regulated trading ban. Their trading performance outperforms other investors at all times, and they continue to exploit their privileged position with respect to information flow. Our study suggests it is inappropriate for emerging market regulators to adopt developed market regulation without first considering the unique characteristics of their own environment.     

The liquidity effects of revisions to the S&P 500 index: an empirical analysis

We study liquidity effects following S&P 500 index revisions. Using a recent sample of S&P 500 additions, we find a sustained increase in the liquidity of the added stocks. Further, the improvement in the liquidity of added stocks is due primarily to a decrease in the direct cost of transacting and a smaller decline in the asymmetric information component. Finally, the event period cumulative abnormal returns for additions are significantly associated with the decrease in the effective spread, particularly the decline in the direct cost of transacting. In contrast, the liquidity of deleted stocks declines over the three months following deletion.     

Excess funds and agency problems: an empirical study of incremental cash disbursements

This study investigates the excess funds hypothesis using samplesof special dividends, regular dividend increases, and self-tenderoffers. All three types of firms tend to have funds in excessof industry norms before the events. The excess funds are largelynonrecurring for special dividend and self-tender offer firmsand recurring for regular dividend increase firms. The analysisof the stock price reaction suggests that large incrementaldisbursements mitigate the agency problem associated with excessfunds. In particular, the stock price reaction is positivelyrelated to excess funds for self-tender offers and large specialdividends, but not for regular dividend increases (which tendto be smaller) or small special dividends.     

The effect of information asymmetry on negotiated budgets: an empirical investigation

This study examines three issues: (1) the effect of information asymmetry on the budget negotiation process, (2) the effect of information asymmetry on budgetary slack when budgets are set through a negotiation process, and (3) whether subordinates consider superiors imposing a budget following a failed negotiation as being low in procedural justice, which in turn causes low subordinate performance. The results suggest that smaller differences in initial negotiation positions do not indicate a higher likelihood of agreement when initial differences are due to differential information symmetry. Further, information asymmetry affects the relationship between negotiation agreement and budgetary slack. Last, inconsistent with a pure economic perspective, having superiors impose a budget after a failed negotiation causes justice or fairness considerations to demotivate subordinates.     

The impact of informed trading on dividend signaling: a theoretical and empirical examination

This paper examines how the trading behavior of various investors impacts the market reaction to a dividend signal. The dividend signaling model incorporates asymmetric information among traders, firm insiders, and the market. This interaction among market participants explains why not all dividend increases are viewed by the market as good news. The model predicts that the announcement day returns for a dividend increase are inversely related to measures of informed trading and decreasing in the level of buy demand relative to sell demand. Further, the model hypothesizes that more informed trading results in larger dividend increases. Empirical tests confirm these predictions.