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How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach

65 Pages Posted: 21 Aug 2010 Last revised: 6 Jul 2015

Jonathan Reuter

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Eric Zitzewitz

Dartmouth College; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2015

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.

Keywords: Mutual funds, performance persistence, managerial skill, diseconomies of scale

JEL Classification: G23, G24, G14

Suggested Citation

Reuter, Jonathan and Zitzewitz, Eric, How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach (July 1, 2015). Available at SSRN: https://ssrn.com/abstract=1661447 or http://dx.doi.org/10.2139/ssrn.1661447

Jonathan Reuter (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric W. Zitzewitz

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~ericz

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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