Initial Fund Size Anomaly and Its Implication for Returns-to-Scale: Evidence From Japanese Mutual Funds

48 Pages Posted: 24 Jan 2018 Last revised: 14 Mar 2018

See all articles by Sho Nishiuchi

Sho Nishiuchi

Hitotsubashi University - Graduate School of International Corporate Strategy

Toshiki Honda

Hitotsubashi University - Graduate School of International Corporate Strategy

Daisuke Miyakawa

Hitotsubashi University

Date Written: January 25, 2018

Abstract

The relationship between the size and return of mutual funds has been a central interest from practical viewpoints. Using the substantial heterogeneity associated with the size of Japanese mutual funds over the early stage of their life cycle, which we call as "initial fund size anomaly", we examine how the returns-to-scale property of mutual funds depend on the initial size of the funds and its size dynamics. Toward this end, first, we document the systematic pattern of the timing for launching fund and find that the fund flows are related to the introduction of new funds. An asset management firm is more likely to launch a fund both when the recently introduced funds attract large inflow and the incumbent funds suffer from large outflow. Second, regarding the reaction of fund flow to the past return, we confirm that fund inflow follows higher past returns, which is consistent with the findings in the extant studies. Third, as the most important results, the returns-to-scale property crucially depends on the initial size and the dynamics of mutual funds. While the funds starting with small size show the widely observed decreasing returns-to-scale, it is not the case for the funds with large initial size and experiencing the reduction in its size. These results jointly suggest that large fund size is driven by the motivations of asset management firms, which results in the biased behavior such as the employment of closet-index strategy.

Keywords: Mutual fund, Active management, Initial fund size anomaly, Decreasing-returns-to-scale

JEL Classification: G11, G23, J24

Suggested Citation

Nishiuchi, Sho and Honda, Toshiki and Miyakawa, Daisuke, Initial Fund Size Anomaly and Its Implication for Returns-to-Scale: Evidence From Japanese Mutual Funds (January 25, 2018). Available at SSRN: https://ssrn.com/abstract=3108665 or http://dx.doi.org/10.2139/ssrn.3108665

Sho Nishiuchi (Contact Author)

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

2-1-2 Hitotsubashi, Chiyoda-ku
Tokyo 101-0003, Chiyoda-ku 101-8439
Japan

Toshiki Honda

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

2-1-2 Hitotsubashi, Chiyoda-ku
Tokyo 101-0003, Chiyoda-ku 101-8439
Japan

Daisuke Miyakawa

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

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