Critical Finance Review > Vol 7 > Issue 2

Closed-End Fund IPOs: Sold, Not Bought

Diana Shao, Oregon State University, USA, , Jay R. Ritter, University of Florida, USA,
Suggested Citation
Diana Shao and Jay R. Ritter (2018), "Closed-End Fund IPOs: Sold, Not Bought", Critical Finance Review: Vol. 7: No. 2, pp 201-240.

Publication Date: 31 Dec 2018
© 2018 2018 Diana Shao and Jay Ritter
Agency problemsClosed-end fundsInitial public offeringsLong-run performanceUnderwriters


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In this article:
1. Introduction 
2. Data 
3. Underperformance of Closed-end Fund IPOs 
4. Closed-End Fund IPOs: Sold, Not Bought 
5. Conclusions 


Closed-end fund (CEF) initial public offerings (IPOs) are priced above their net asset value due to the sales load paid to the underwriters. Within five months of the IPO, the CEFs start trading at a discount. By six months post-IPO, the average raw return is −4.75%, underperforming seasoned funds by 8.52%. We explain how data mistakes in Cherkes et al. (2009 RFS) lead them to find much less underperformance than we document. We propose an agency hypothesis to explain the creation of CEFs despite these negative returns. We posit that full-service brokers/investment advisors create demand for CEF IPOs among their retail clients when the time-varying reputational cost is low. Intensive price support delays and obfuscates the subsequent price decline. In other words, CEF IPOs are sold, not bought.