Diseconomies of Scale in the Actively-Managed Mutual Fund Industry: What Do the Outliers in the Data Tell Us?

56 Pages Posted: 11 Jun 2018 Last revised: 28 Aug 2019

See all articles by John C. Adams

John C. Adams

University of Texas at Arlington

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Sattar Mansi

Virginia Polytechnic Institute & State University

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Date Written: June 11, 2018

Abstract

Recent research suggests that improper identification of outliers can lead to distorted inference. We investigate this issue by examining the role that multivariate outliers play in research outcomes using the Chen, Hong, Huang, and Kubik (2004) study. We find that the documented negative relation between scale and return performance in the actively managed mutual fund industry is an artifact of extreme observations. A manual examination of the most influential observations with verifications against outside sources shows that these outliers are largely bad data. Removing the errors reduces the point estimates on the effect of fund size, rendering it economically and statistically insignificant. Further analysis employing regressions that mitigate outlier-induced bias and extending the sample through 2014 confirm our findings. Our evidence contributes to the recent research on the importance of outlier identification in finance research.

Keywords: Diseconomies of Scale, Mutual Fund, Liquidity, Influential Observations, Outliers

JEL Classification: G10, G11, G12, G19, G20, G30

Suggested Citation

Adams, John C. and Hayunga, Darren K. and Mansi, Sattar, Diseconomies of Scale in the Actively-Managed Mutual Fund Industry: What Do the Outliers in the Data Tell Us? (June 11, 2018). Available at SSRN: https://ssrn.com/abstract=3194005 or http://dx.doi.org/10.2139/ssrn.3194005

John C. Adams

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States
904-476-2946 (Phone)

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-1365 (Phone)

Sattar Mansi (Contact Author)

Virginia Polytechnic Institute & State University ( email )

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