What Can “Nine‐Eleven” Tell Us about Closed‐end Fund Discounts and Investor Sentiment?

Abstract

We use the horrific events of September 11, 2001 ("nine-eleven") as a natural test of the hypothesis that closed-end mutual fund discounts from fund net asset values reflect small investor sentiment. Because nine-eleven was a sudden, unforeseen, and significantly negative and exogenous shock to the world, the capital markets, and investor sentiment, our test avoids many of the problems of extant studies. Discounts worsened dramatically following the event, and then recovered alongside the broader market. This finding is consistent with the hypothesis that discounts reflect the sentiment of small investors, who took their cues from the broader market's overall movement.We thank Steve Ferris, the editor, and two anonymous reviewers for helpful comments. We also thank Hua (Allen) Song for helpful research assistance, and Larry Fauver and Andrea Heuson for helpful comments. 515 516 T. R. Burch et al./The Financial Review 38 (2003) [515][516][517][518][519][520][521][522][523][524][525][526][527][528][529]

Large market shocks and abnormal closed-end-fund price behaviour

“…Hence, our findings do not support the contention in Burch et al (2003) that the pattern in closed-end fund discounts following large market-wide shocks is driven by the sentiment of investors who look to the broader market's overall movement for guidance.…”

“…In the event that financial intermediaries would need to sell assets to meet these requirements, prices would fall still further. 14 In this environment where financial intermediaries become consumers of 13 Despite the marked persistence in mean discounts and notwithstanding the low power of standard unit root tests, the augmented Dickey-Fuller and Phillips-Perron test statistics at À2.817 and À2.815 (computed on the full sample period) confirm that discounts are stationary in line with the findings in Pontiff (1995) and Burch et al (2003). In our analysis, a model is fitted to the average discount.…”

“…Third, Burch et al (2003) investigate the post-'Nine-Eleven' discount behaviour on a sample of US-traded equity and bond closed-end funds. They find that discounts widen significantly from 3.3% on the last trading Friday before the 9/11 shock (seventh September 2001) to 7.7% on the first trading Friday post-shock (21st September).…”

“…Although several studies (Thompson, 1978;Anderson, 1986;Pontiff, 1995) investigate the long-term behaviour of the discount, no study, apart from Burch et al (2003), examines the short-term discount pattern during periods of market stress. In contrast to Burch et al, however, we do not limit ourselves to investigating the closed-end fund price reaction to the 9/11 terrorist attacks.…”

Impact of Terrorism on Hospitality Stocks and the Role of Investor Sentiment

“…Chen and Siems (2004) study fewer than twenty events and conclude that, although stock market returns are generally negative, U.S. capital markets are more resilient now than they have been in the past and recover sooner than other capital markets. Burch, Emery, and Fuerst (2003) study the impact of the 9/11 terrorist attacks on closed-end mutual fund discounts and find that discounts worsened dramatically following the event, presumably as a reflection of negative sentiment, but subsequently recovered alongside the broader market. Our study also focuses on immediate impact as it seeks to isolate the sentiment-based response to terrorism and to identify any predictable patterns in equity returns.…”