The Impact of Rights Offerings on the Shares of Closed-End Country Funds: Theory and Evidence


Closed-end funds have presented somewhat of an enigma to the finance profession. These funds, which generally can only be purchased or sold in the open market, tend to trade at discounts to the net asset value of their holdings. In recent years several closed-end hedge funds have come into existence as well. This article examines the impact of rights offerings on the shares of closed-end country funds. Closed-end funds frequently announce rights offering that enable their shareholders to buy new shares at a discount. Utilizing a quasi-arbitrage framework, the article theorizes how the rights offering should affect the shares, focusing most specifically on the announcement day and ex-date event windows. The theoretical model presented is then tested against the empirical data. It is found that the rights offerings have a substantial negative impact on the shares of closed-end country funds, but that behavior during the event windows is contrary to the predictions of the theoretical model.

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The Journal of Alternative Investments