A Neoclassical Model of Managed Distribution Programs: Theory and Evidence
Jensen (1986) identifies as a major problem of corporate finance the need to motivate managers to distribute funds that earn a ‘below-market’ rate of return. Equity closed-end funds (CEFs) provide an example of how capital markets perform this function. CEFs exist to provide investors with portfolio services that investors cannot easily obtain on their own (e.g., liquidity or superior stock picking ability). When a fund does not convincingly provide these services, it trades at a discount to its net asset value (NAV) because, through their fees, managers share the NAV of the fund with investors. A managed distribution program (MDP) where investments are liquidated to increase investors’ cash flows lowers the value of the manager’s claim on the NAV of the fund. This is a direct transfer of wealth from the manager to the shareholders á la Jensen, and will be adopted by managers who fear an eventual liquidation of the fund via a proxy vote. We model the threat of such liquidation through the intermediation of an activist shareholder. Our model predicts that MDPs are more likely to be adopted by funds that appear to be less effective in providing portfolio services to their investors and that are relatively easy to liquidate or ‘attack’. We test the model on a panel of CEFs and find strong agreement. In particular, when we include our proxies for the fundamental drivers of the fund’s discount in estimating the likelihood of an MDP adoption, the discount itself becomes insignificant. We interpret this to indicate that both the CEF discount and the likelihood of market disciplinary measures are based on economic fundamentals.
Closed-end funds CEFs managed distribution plans MDPs
Martin Cherkes Jacob S. Sagi Jay Wang
Graduate School of Business, Columbia University, 3022 Broadway, Uris Hall, NY, NY 10027 Owen Graduate School of Management, Vanderbilt University, 401 21st Ave S., Nashville, TN 37203-2422 College of Business, University of Illinois at Urbana-Champaign, 1206 S. 6th Street, Champaign, IL 6
国际会议
广州
英文
1-39
2009-07-07（万方平台首次上网日期，不代表论文的发表时间）