J U N E 1977 THE VALUATION OF CLOSED-END INVESTMENT-COMPANY SHARES BURTON MALKIEL* G. MOSTACADEMIC RESEARCH on stock prices has Strongly supported the view that securities markets are highly efficient.â Stock prices quickly reflect all publicly available information relevant to the companiesâ future prospects. Therefore, at any time, the tableau of actual stock prices provides the best estimates available of the present values of the shares. The pricing of shares of closed-end investment companies appears to provide a startling counter-example to the general rule. These companies invest in a portfolio of stocks and other securities just as do open-end mutual funds. Unlike the mutual funds, however, closed-end companies neither issue new shares nor redeem outstanding ones. Investors who wish to purchase or sell closed-end shares must do so on the open market at prices reflecting not the net asset values of the companies but rather the supply and demand for the shares. Therein lies the seeming inconsistency with the efficient-markets hypothesis. The shares of closed-end investment companies usually sell at discounts, and sometimes at substantial discounts, from the actual values of the portfolios of stocks they hold. This paper attempts to develop some theoretical principles concerning the valuation
The Journal of Finance – Wiley
Published: Jun 1, 1977
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