Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-26T08:33:58.619Z Has data issue: false hasContentIssue false
  • English
  • Français

Agency Conflicts in Closed-End Funds: The Case of Rights Offerings

Published online by Cambridge University Press:  06 April 2009

Ajay Khorana ,
Sunil Wahal  and
Marc Zenner
Ajay Khorana
Affiliation:
[email protected], Georgia Institute of Technology, DuPree College of Management, Atlanta, GA 30332
Sunil Wahal
Affiliation:
[email protected], Emory University, Goizueta Business School, 1300 Clifton Road, Atlanta, GA 30322
Marc Zenner
Affiliation:
[email protected], University of North Carolina, Kenan Flagler Business School, McColl Building CB 3490, Chapel Hill, NC 27599.
Get access Rights & Permissions [Opens in a new window]

Abstract

We study 120 rights offerings by closed-end funds from 1988–1998. On average, rights offerings are announced when funds trade at a premium. This premium turns into a discount over the course of the offering. The premium decline is more severe when increases in the investment advisor's compensation are larger and when the fund uses affiliated brokerdealers to solicit subscriptions to the offer. A clinical analysis shows that rights offerings allow investment advisors to sidestep fee rebates and increase pecuniary benefits to affiliated entities. Overall, our results suggest the presence of significant conflicts of interest in rights offerings by closed-end funds.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 2 , June 2002 , pp. 177 - 200
Copyright
Copyright © School of Business Administration, University of Washington 2002

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

Ambarish, R.; John, K.; and Williams, J.. “Efficient Signaling with Dividends and Investments.” Journal of Finance, 42 (1987), 321–344.CrossRefGoogle Scholar
Asquith, P., and Mullins, D.. “Equity Issues and Stock Price Dilution.” Journal of Financial Economics, 15 (1986), 61–89.CrossRefGoogle Scholar
Barclay, M. J., and Litzenberger, R. H.. “Announcement Effects of New Equity Issues and the Use of Intraday Price Data.” Journal of Financial Economics, 21 (1988), 71–99.CrossRefGoogle Scholar
Barclay, M. J.; Holderness, C. G.; and Pontiff, J.. “Private Benefits from Block Ownership and Discounts on Closed-End Funds.” Journal of Financial Economics, 33 (1993), 263–291.CrossRefGoogle Scholar
Bonser-Neal, C.; Brauer, G.; Neal, R.; and Wheatley, S.. “International Investment Restrictions and Closed-End Country Fund Prices.” Journal of Finance, 45 (1990), 523–547.Google Scholar
Boudreaux, K. J. “Discounts and Premiums on Closed-End Funds: A Study in Valuation.” Journal of Finance, 28 (1973), 515–522.Google Scholar
Brauer, G. A. “Open-Ending Closed-End Funds.” Journal of Financial Economics, 13 (1984), 461–507.CrossRefGoogle Scholar
Brauer, G. A.. “Closed-End Fund Shares' Abnormal Returns and the Information Content of Discounts and Premiums.” Journal of Finance, 43 (1988), 113–127.Google Scholar
Brickley, J. A., and Schallheim, J. S.. “Lifting the Lid on Closed-End Investment Companies: A Case of Abnormal Returns.” Journal of Financial and Quantitative Analysis, 20 (1985), 107–117.CrossRefGoogle Scholar
Brickley, J. A.; Manaster, S.; and Schallheim, J. S.. “The Tax-Timing Option and the Discount on Closed-End Investment Companies.” Journal of Business, 64 (1991), 267–292.Google Scholar
Burch, T., and Hanley, K. W.. “When Are Closed-End Funds Open? Rights Offers as a Response to Premiums.” Working Paper, Univ. of Maryland (1996).Google Scholar
Chay, J. B., and Trczinka, C.. “Managerial Performance and the Cross-Sectional Pricing of Closed-End Funds.” Journal of Financial Economics, 52 (1998), 379–408.CrossRefGoogle Scholar
Coles, J. L.; Suay, J.; and Woodbury, D.. “Fund Advisor Compensation in Closed-End Funds.” Journal of Finance, 55 (2000), 1385–1414.CrossRefGoogle Scholar
Cooney, J., and Kalay, A.. “Positive Information from Equity Issue Announcements.” Journal of Financial Economics, 33 (1993), 149–172.CrossRefGoogle Scholar
Gould, C. “Are Rights Offerings Too Perilous forMutual Fund Investors?” New York Times (11/30/93).Google Scholar
Gruber, M. J. “Another Puzzle: The Growth in Actively Managed Mutual Funds.” Journal of Finance, 51 (1996), 783–810.CrossRefGoogle Scholar
Hansen, L. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 1029–1054.CrossRefGoogle Scholar
Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the S&P 500: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (1986), 815–829.CrossRefGoogle Scholar
Jung, K.; Kim, Y.-C.; and Stulz, R.. “Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision.” Journal of Financial Economics, 42 (1996), 159–185.CrossRefGoogle Scholar
Masulis, R. W., and Korwar, A. N.. “Seasoned Equity Issues: An Empirical Investigation.” Journal of Financial Economics, 15 (1986), 91–118.CrossRefGoogle Scholar
Mikkelson, W. H., and Partch, M.. “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics, 14 (1986), 165–194.CrossRefGoogle Scholar
Miles, J., and Peterson, M.. “The Reprise of the Rights Issue.” Working Paper, Pennsylvania State Univ. (1996).Google Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 197–221.CrossRefGoogle Scholar
Noreen, E.W., and Wolfson, M.. “Equilibrium Warrant Pricing Models and Accounting for Executive Stock Options.” Journal of Accounting Research, 19 (1981), 384–398.CrossRefGoogle Scholar
Norton, L. P. “The Wrong Stuff: Closed-End Rights Offerings Help Fund Managers, Not Investors.” Barrons (12/04/1995), 20.Google Scholar
Power, W. “Gabelli Asks for More, Again.” Wall Street Journal (09/25/1992), C1.Google Scholar
Power, W.. “Rights Offerings Proliferate as Funds Entice Investors to Buy More Stock.” Wall Street Journal (10/25/1993), 14.Google Scholar
Roenfeldt, R., and Tuttle, D. L.. “An Examination of the Discounts and Premiums of Closed-End Investment Companies.” Journal of Business Research, 1 (1973), 129–140.CrossRefGoogle Scholar
Savitz, E. J. “Oops! Nuveen Discovers Two Large Rights Offerings weren't Exactly Kosher.” Barrons (08/1/1994), 35.Google Scholar
Scholes, M. S. “The Market for Securities: Substitution versus Price Pressure and the Effect of Information on Share Prices.” Journal of Business, 45 (1972), 179–211.CrossRefGoogle Scholar
Securities and Exchange Commission. “Opening Remarks at the SEC Roundtable on the Role of Independent Investment Company Directors.” http://www.sec.gov/news/speeches/spch253.htm (1999).Google Scholar
Shleifer, A. “Do Demand Curves for Stock Slope Down?” Journal of Finance, 41 (1986), 579–590.CrossRefGoogle Scholar