Signaling or marketing? The role of discount control mechanisms in closed-end funds

We study the relevance of signaling and marketing as explanations for the discount control mechanisms that a closed-end fund may choose to adopt in its prospectus. These policies are designed to narrow the potential gap between share price and net asset value, measured by the fund's discount. The two most common discount control mechanisms are explicit discretion to repurchase shares based on the magnitude of the fund discount and mandatory continuation votes that provide shareholders the opportunity to liquidate the fund. We find very limited evidence that a discount control mechanism serves as costly signal of information. Funds with mandatory voting are not more likely to delist than the rest of the CEFs in general or whenever the fund discount is large. Similarly, funds that explicitly discuss share repurchases as a potential response do not subsequently buy back shares more often when discounts do increase. Instead, the existence of these policies is more consistent with marketing explanations because the policies are associated with an increased probability of issuing more equity in subsequent periods.