Managerial Ability, Compensation, and the Closed-End Fund Discount




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    • Berk is at U.C. Berkeley and the National Bureau of Economic Research. Stanton is at U.C. Berkeley. This material is based upon work supported by the National Science Foundation under Grant No. 0339834. The authors gratefully acknowledge helpful comments and suggestions from Greg Brown, Martin Cherkes, Josh Coval, Bruno Gerard, Rick Green, Steve Grenadier, David Musto, Matthew Richardson, Steve Ross, Jacob Sagi, Mark Seasholes, Laura Starks, Josef Zechner, and seminar participants at Arizona, California State University (Fullerton), Columbia, Emory, Houston, INSEAD, London Business School, Massachusetts Institute of Technology, Michigan, Michigan State, Northwestern, Norwegian School of Economics, Norwegian School of Management, Simon Fraser, Texas A&M, UC Berkeley, UC Irvine, UNC, UT Austin, Wharton, the 2003 UBC Summer Finance Conference, the 2004 WFA meetings, and the 2004 University of Oregon conference on Delegated Portfolio Management. We are grateful for financial support from the Fisher Center for Real Estate and Urban Economics.


This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed-end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model's ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained.