TY  - JOUR
AU  - Berk,Jonathan
AU  - Stanton,Richard
TI  - A Rational Model of the Closed-End Fund Discount
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10412
PY  - 2004
Y2  - April 2004
UR  - http://www.nber.org/papers/w10412
L1  - http://www.nber.org/papers/w10412.pdf
N1  - Author contact info:
Jonathan B. Berk
Graduate School of Business
Stanford University
518 Memorial Way
Stanford CA 94305-5015
Tel: 650/721-1280
Fax: 650/725-6152
E-Mail: jonathan.b.berk@gmail.com

Richard Stanton
Haas School of Business
University of California, Berkeley
545 Student Services Bldg #1900
Berkeley, CA 94720-1900
Tel: 510-642-7382
E-Mail: stanton@haas.berkeley.edu
AB  - The discount on closed-end funds is widely accepted as proof of investor irrationality. We show,however, that a parsimonious rational model can generate a discount that exhibits many of the characteristics observed in practice. The only required features of the model are that managers have (imperfectly observable) ability to generate excess returns; they sign long-term contracts guaranteeing them a fee each year equal to a fixed fraction of assets under management; and they can leave to earn more money elsewhere if they turn out to be good. With these assumptions, time-varying discounts are not an anomaly in a rational world with competitive investors -- they are required.
ER  -