Trading Profits in Closed-End Fund Tender Offers

Prior research has documented anomalous profits as high as 9% from participating in stock repurchase tender offers. The trading strategy is to buy shares in the market just before offer expiration and tender; it involves a trading horizon of just a few days. The large profits given a short trading horizon are puzzling, and this evidence raises serious questions about market efficiency. A possible reason inhibiting arbitragers from eliminating these profits is risk exposure. We examine whether trading profits are available in tender offer repurchases conducted by closed-end funds. Risk exposure concerns should be minimized for these offers, since the underlying assets of closed-end funds constitute a well-diversified portfolio of securities. We find significant tendering profits even in this sample, although the magnitude is much smaller at around 1%.