How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach / Jonathan Reuter, Eric Zitzewitz.

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Reuter, Jonathan

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w16329.Publication details: Cambridge, Mass. National Bureau of Economic Research 2010.Description: 1 online resource: illustrations (black and white)Subject(s):

G14 - Information and Market Efficiency • Event Studies • Insider Trading
G23 - Non-bank Financial Institutions • Financial Instruments • Institutional Investors
G24 - Investment Banking • Venture Capital • Brokerage • Ratings and Ratings Agencies

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Abstract: The level of diseconomies of scale in asset management has important implications for tests of manager skill and the expected level of performance persistence. To identify the causal impact of fund size on future returns, we exploit the fact that small differences in returns can cause discrete changes in Morningstar ratings that, in turn, generate discrete differences in size. Despite robust evidence that Morningstar ratings increase fund size, our regression discontinuity estimates yield little evidence that fund size erodes returns. Consequently, any downward bias in standard estimates of performance persistence due to diseconomies of scale is likely to be small.

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September 2010.

The level of diseconomies of scale in asset management has important implications for tests of manager skill and the expected level of performance persistence. To identify the causal impact of fund size on future returns, we exploit the fact that small differences in returns can cause discrete changes in Morningstar ratings that, in turn, generate discrete differences in size. Despite robust evidence that Morningstar ratings increase fund size, our regression discontinuity estimates yield little evidence that fund size erodes returns. Consequently, any downward bias in standard estimates of performance persistence due to diseconomies of scale is likely to be small.