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Short Sale Restrictions, Differences of Opinion, and Closed-End Fund Discount

The purpose of this paper is to study the closed-end fund discount in Miller’s (1977) framework. Miller’s theory states that in the simultaneous presence of (1) short sale restrictions and (2) dispersion of investors’ opinions, securities become overvalued. We show that discounts of single-country closed-end funds are related to overpricing of the securities in the foreign market due to Miller’s two conditions. Consistent with theoretical predictions, we find that either dispersion of investor opinions or short sale restrictions alone are not positively related to the discount. However, when both conditions exist simultaneously, the observed fund discounts are significantly larger.