What Drives Closed-End Fund Discounts? Evidence from COVID-19

Exploiting the exogenous COVID-19 shock, this paper attempts to shed light on the closed-end fund (CEF) discount puzzle. CEF discounts increased substantially after COVID-19, and I identify a causal role of sentiment in this effect. I show that COVID-19 reduced individual investor sentiment. Using the difference-in-differences (DiD) approach, I find that CEFs with higher sentiment beta or higher retail ownership experienced a larger increase in discounts after the COVID-19 shock. The DiD results are unlikely to be driven by alternative channels such as the liquidity, expense, payout, and leverage channels. Overall, the results support the sentiment-based explanation of CEF discounts.