Edited by James R. Barth, Chen Lin and Clas Wihlborg
Chapter 27: Redeemability as Governance: A Study of Closed-end and Open-end Funds under Common Management
Peter MacKay* 27.1 INTRODUCTION The ability to reclaim resources from managers is perhaps the most direct way to moderate principal–agent relations. This point is made by Fama and Jensen (1983a, 1983b, 1985) who argue that the option shareholders have to liquidate an organization’s assets as an ultimate recourse acts as a powerful corporate governance mechanism. Despite its appeal, this argument has received little attention in the literature.1 Instead, most research studies the role of board structure, large shareholders and managerial ownership in aligning claimant interests, particularly within non-financial firms. This chapter examines the importance of reclaimable assets as a governance mechanism by comparing the performance and operation of redeemable and non-redeemable assets under common management, namely, open- and closed-end funds run by the same investment fund company (fund family). I hypothesize that the difference in share redeemability across funds within a family induces managers to favor their open-end funds over their closed-end funds (favoritism). This might entail channeling superior trades and resources toward their open-end funds, a hypothesis I also test. My research design draws on four features of investment funds in China. Firstly, redeemable open-end funds have only been allowed in China since 2001; only closed-end funds were available prior to this. In many cases, open- and closed-end funds belong to the same fund family. Importantly, opening closed-end funds was not allowed until 2006. This stark difference between open- and closed-end funds in China avoids the identification and endogeneity problems that plague the US setting. Thus, the years...
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