Diseconomies of Scale, Information Processing and Hierarchy Costs: Evidence from Asset Management

35 Pages Posted: 18 Mar 2017 Last revised: 20 Apr 2018

Richard B. Evans

University of Virginia - Darden School of Business

Martin Rohleder

University of Augsburg

Hendrik Tentesch

University of Augsburg - Department of Finance and Banking

Marco Wilkens

University of Augsburg

Date Written: April 4, 2018

Abstract

Previous research has suggested that information processing and hierarchy costs play a role in firm-level diseconomies of scale. Using separate accounts (SAs) as a laboratory, we examine if these costs vary across investment style (quantitative vs. fundamental) and what role, if any, they play in producing diseconomies of scale. Consistent with lower hierarchy costs, the average investment professional (e.g., portfolio manager, research analyst, and trader) at a quantitative investment advisor manages two to three times more assets than fundamental advisors. Consistent with greater use of hard information and lower information processing costs, the performance of quantitative SAs exhibit higher factor model R2s, and greater stability in factor betas and tracking error after a change in the management team than fundamental SAs. Moreover, we find higher information diffusion speed in quant SA firms than in fundamental firms, also consistent with lower information processing costs. Finally, controlling for liquidity costs, we find the performance of quantitative SAs is unrelated to size, while fundamental SAs exhibit statistically and economically significant diseconomies of scale. Overall, our results suggest that information processing and hierarchy costs are a source of diseconomies of scale in asset management.

Keywords: Diseconomies of scale, quantitative, fundamental, performance, flows, hierarchy costs, information processing, separate accounts, institutional investing

JEL Classification: G11, G12, L11, L23, L25

Suggested Citation

Evans, Richard B. and Rohleder, Martin and Tentesch, Hendrik and Wilkens, Marco, Diseconomies of Scale, Information Processing and Hierarchy Costs: Evidence from Asset Management (April 4, 2018). Available at SSRN: https://ssrn.com/abstract=2933546 or http://dx.doi.org/10.2139/ssrn.2933546

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Martin Rohleder (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Hendrik Tentesch

University of Augsburg - Department of Finance and Banking ( email )

Universitaetsstr. 2
Augsburg, 86135
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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