The Agency Effect of Repurchases on Closed-End Funds

Share prices rise after companies announce repurchases, but there are differing views as to why this happens. Repurchases are announced by closed-end funds when their discounts are widening (market-to-book is falling). The immediate post-announcement effect is a small jump in a fund's share price, but the main effect occurs over the next four years during which time there is significant outperformance both of the fund's price and of its investment portfolio. Liquidity of the shares does not change. Repurchases, if executed, reduce the size of a fund and therefore the manager's fees. Our findings are consistent with directors using the threat of repurchases to discipline managers whose investment performance has been poor, leading to a closer alignment of pay and performance.