Agency conflicts in closed-end funds: The case of rights offerings

Agency conflicts in closed-end funds: The case of rights offerings
Author(s): Wahal, Sunil and Khorana, Ajay and Zenner, Marc
Year: 2001
Paper Number: GBS-FIN-2001-001
Goizueta Department: Finance

Abstract

We study 120 rights offerings by closed-end funds over 1988-1998. On average, rights offerings are announced when funds trade at a premium. This premium turns into a discount over the course of the offering. The premium decline is more severe when the increases in investment advisor's compensation are larger and when the fund uses affiliated broker-dealers to solicit subscriptions to the offer. A clinical analysis shows that rights offerings allow investment advisors to sidestep fee rebates and increase pecuniary benefits to affiliated entities. Overall, our results suggest the presence of significant conflicts of interests in rights offerings by closed-end funds.