Mergers of Closed-End Funds: An Analysis of Discount and Expense Ratio Reduction

The purpose of this study is to examine the pricing behavior and the discount of U.S. withinfamily closed-end funds merger, i.e., mergers between acquiring and target funds belonging to same fund families. There is no specific research on this issue since limited number of previous studies examines the determinants of open-end fund mergers and their subsequent wealth impact on shareholders of target and acquiring funds (Jayaraman, Khorana and Nelling (2002); Zhao (2005); and Ding (2006)) and the relationship between mergers and board structures (Khorana, Tufano, and Wedge (2007)). Considering the fact that exit decision literature for open-end funds is still growing, it is not surprising that no previous work addressed these issues in the context of closed-end funds whose total market value is approximately one fortieth of their open-end counterparts.1 This paper contributes to the growing literature on merger and closed-end funds with an empirical examination of discounts and expense ratios of both target and acquiring closed-end funds around the merger announcement which is critical to understanding observed discounts on both parties as such announcements might have impact on shareholders’ wealth through fluctuating discounts. Closed-end fund management companies would be better off by knowing whether economies of scale can be achieved though mergers. Finally, as stated in Ding (2006),