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Managed Distribution Policies in Closed-End Funds and Shareholder Activism

Published online by Cambridge University Press:  08 April 2015

Martin Cherkes ,
Jacob S. Sagi  and
Z. Jay Wang
Martin Cherkes
Affiliation:
mcherkes@stern.nyu.edu, Stern School of Business, New York University, 44 W 4th St, New York, NY 10012
Jacob S. Sagi
Affiliation:
jacob_sagi@kenan-flagler.unc.edu, Kenan-Flagler Business School, University of North Carolina at Chapel Hill, CB 3490, Chapel Hill, NC 27599
Z. Jay Wang
Affiliation:
zhiw@uoregon.edu, Lundquist College of Business, University of Oregon, 1208 University of Oregon, Eugene, OR 97403.
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Abstract

In closed-end funds, a managed distribution policy (MDP) is a dividend commitment potentially requiring the liquidation of assets. We argue that MDPs lower managerial claims on fund assets and, when the fund is at a discount, increase shareholder value. This transfer of wealth can be rationalized by managers wishing to deter a challenge from activist shareholders through a costly proxy vote. We find strong empirical evidence that managers respond to the presence of activists using MDPs, that MDPs constitute an effective wealth transfer to shareholders, and that activists are less likely to challenge management when an MDP is in place.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 5-6 , December 2014 , pp. 1311 - 1337
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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