The Closed-End Fund Puzzle: New Evidence From Business Development Companies

Abstract

The phenomenon of closed-end funds (CEFs) trading at a discount to their Net Asset Value (NAV) has long been discussed in financial economic literature. While market data from traditional CEFs has been extensively studied, this paper presents novel evidence on the subject from a subset of CEFs known as business development companies (BDCs). This paper shows that, to the extent they are testable, the features of the closed-end fund puzzle are present in the BDC market. Furthermore, the characteristics of BDC discounts generally corroborate the predictions of the behavioral explanation of the closed-end fund puzzle. Qualities observed in the BDC discount data in support of the behavioral hypothesis include: price-driven fluctuations in BDC discounts, empirical independence between observed discounts and commonly cited neoclassical determinants of discounts, and a relationship between proxy noise trader prevalence and sentiment-dominant discount behavior.