Discounts in closed-end investment trusts, a source of abnormal returns?: A study on the British market 2000-2009

Abstract: We investigate if the ratio of net asset value to market value (discount if market value is lower than net asset value, premium if market value is higher than net asset value) is a factor driving abnormal returns in British investment trusts companies (ITC). We control for other factors commonly thought to predict returns above the Capital Asset Pricing Model but still find the size of the contribution from a discount on abnormal returns to be quite substantial. Our conclusion is that the discount represents some sort of underpricing that leads to returns above the expected level. This is in violation of the idea about efficient markets which says that all publicly known information should already be reflected in the share price. Hence, it should not be possible to predict excessive risk adjusted returns by studying easily available accounting information if we have efficient markets.