Investor Sentiment and the Closed-End Fund Puzzle





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    • Lee is Assistant Professor of Accounting at the School of Business, University of Michigan. Shleifer is Professor of Economics at Harvard University. Thaler is the Henrietta Johnson Louis Professor of Economics at the Johnson Graduate School of Management, Cornell University. We would like to acknowledge helpful comments from Greg Brauer, Eugene Fama, Ken French, Raymond Kan, Merton H. Miller, Sam Peltzman, Mark Ready, Sy Smidt, René Stulz, Lawrence Summers, Robert Vishny, Robert Waldmann, and an anonymous referee, and financial support from Russell Sage Foundation and Social Sciences and Humanities Research Council of Canada. Thanks also to Greg Brauer, Nai-Fu Chen, Thomas Herzfeld, and Jay Ritter for providing data, and Sheldon Gao and Erik Herzfeld for research assistance.


This paper examines the proposition that fluctuations in discounts of closed-end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, we find that both closed-end funds and small stocks tend to be held by individual investors, and that the discounts on closed-end funds narrow when small stocks do well.