How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach
66 Pages Posted: 7 Sep 2010 Last revised: 27 Sep 2010
Date Written: 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.
Suggested Citation: Suggested Citation