Informative Fund Size, Managerial Skill and Investor Rationality

49 Pages Posted: 28 Sep 2017

See all articles by Min Zhu

Min Zhu

University of Queensland

Date Written: September 20, 2017


This paper considers the nature of returns to scale in active management following Pastor, Stambaugh and Taylor (2015) who fail to establish diseconomies of scale at the fund level. Using an enhanced empirical strategy, we find a significant negative impact of fund size on performance. This empirical evidence indicates that fund alpha and fund size are not independent entities. Consequently, skill, rather than being measured by the fund alpha, should be measured by the value that a fund extracts from capital markets. We also show that there is little support for the prevailing belief that as a group, mutual fund investors are naive.

Keywords: Mutual Funds, Managerial Skill, Diseconomies of Scale, Investor Rationality

JEL Classification: G11, G23, J24

Suggested Citation

Zhu, Min, Informative Fund Size, Managerial Skill and Investor Rationality (September 20, 2017). Available at SSRN: or

Min Zhu (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072

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