Managed Distribution Policies in Closed-End Funds and Shareholder Activism

Abstract

A Managed Distribution Policy (MDP), where investments might be partially liquidated to increase investors' cash flows, can lower the value of manager's claim on asset payoffs. This is a direct transfer of wealth from the management to the shareholders, and might be adopted by managers to deter attacks from activist shareholders. Our empirical tests on a panel of 236 closed-end funds provide strong evidence that managers respond to the presence of activists using MDPs, that this indeed constitutes an effective wealth transfer to shareholders, and that economic fundamentals (asset liquidity, share liquidity, managerial compensation) are key to understanding these effects.