Lee, Shleifer, and Thaler (1991) examine the idea that fluctuations in discounts on closed-end funds are driven by changes in individual investor sentiment toward closed-end funds and other securities. The theory suggests that discounts on various funds must move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts on the funds fluctuate together with prices of securities affected by the same investor sentiment. The evidence supports these predictions. In particular, they find that discounts on closed-end funds narrow when small stocks do well, as would be expected if closed-end funds were subject to the same sentiment as small stocks, which tend also to be held by individual investors. The evidence thus suggests that investor sentiment affects security returns. The paper reviews and extends the implications of a model developed by DSSW (1990), which posits that rational investors interact with noise traders who are less than fully rational. The model suggests that fluctuations in investor sentiment can lead to fluctuations in demand for closed-end fund shares, which are reflected in changes in discounts. The paper presents empirical evidence largely consistent with these implications. The authors find that discounts on closed-end funds are highly correlated across funds, which supports the idea that discounts are driven by the same investor sentiment. They also find that new funds tend to get started when old funds sell at premiums or small discounts, which is consistent with the investor sentiment hypothesis. Additionally, they find that changes in discounts on closed-end funds are correlated with returns on portfolios of stocks, particularly smaller stocks, which supports the idea that individual investor sentiment affects both closed-end funds and smaller stocks. The authors also find that discounts on closed-end funds narrow when smaller stocks do well, which is consistent with the hypothesis that individual investor sentiment is particularly important for the prices of smaller stocks and of closed-end funds. The evidence suggests that investor sentiment affects security returns and that closed-end funds are subject to the same sentiment as other securities. The paper concludes that investor sentiment is a key factor in the pricing of closed-end funds and that the discounts on these funds reflect changes in individual investor sentiment.Lee, Shleifer, and Thaler (1991) examine the idea that fluctuations in discounts on closed-end funds are driven by changes in individual investor sentiment toward closed-end funds and other securities. The theory suggests that discounts on various funds must move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts on the funds fluctuate together with prices of securities affected by the same investor sentiment. The evidence supports these predictions. In particular, they find that discounts on closed-end funds narrow when small stocks do well, as would be expected if closed-end funds were subject to the same sentiment as small stocks, which tend also to be held by individual investors. The evidence thus suggests that investor sentiment affects security returns. The paper reviews and extends the implications of a model developed by DSSW (1990), which posits that rational investors interact with noise traders who are less than fully rational. The model suggests that fluctuations in investor sentiment can lead to fluctuations in demand for closed-end fund shares, which are reflected in changes in discounts. The paper presents empirical evidence largely consistent with these implications. The authors find that discounts on closed-end funds are highly correlated across funds, which supports the idea that discounts are driven by the same investor sentiment. They also find that new funds tend to get started when old funds sell at premiums or small discounts, which is consistent with the investor sentiment hypothesis. Additionally, they find that changes in discounts on closed-end funds are correlated with returns on portfolios of stocks, particularly smaller stocks, which supports the idea that individual investor sentiment affects both closed-end funds and smaller stocks. The authors also find that discounts on closed-end funds narrow when smaller stocks do well, which is consistent with the hypothesis that individual investor sentiment is particularly important for the prices of smaller stocks and of closed-end funds. The evidence suggests that investor sentiment affects security returns and that closed-end funds are subject to the same sentiment as other securities. The paper concludes that investor sentiment is a key factor in the pricing of closed-end funds and that the discounts on these funds reflect changes in individual investor sentiment.