Equity closed-end fund discounts and taxes

After documenting CRSP errors in classifying the tax status of distributions, we make use of two important institutional features that the related literature has ignored: (i) tax rate changes and (ii) non-taxable distributions. We find that taxable distributions lead to discount reductions, and the reduction is greater during high tax periods than during low tax periods. By contrast, non-taxable distributions have no discernible impact on the discount, consistent with a tax-based explanation. Importantly, we are able to rule out a competing short-term trading hypothesis. Taken together, our results highlight the importance of personal taxes in explaining closed-end fund discounts.