Skill, Scale, and Value Creation in the Mutual Fund Industry
99 Pages Posted: 31 Oct 2018 Last revised: 22 Jan 2021
Date Written: July 8, 2020
We develop a flexible and bias-adjusted approach to jointly examine skill, scale, and value added across individual funds. We find that the value added is (i) positive for the majority of funds, and (ii) approaches its optimal level after an adjustment period possibly due to investors’ learning. We also show that the skill and scale coefficients (i) vary substantially across funds, and (ii) are strongly positively correlated–two features that shape the value added distribution. These results are consistent with theoretical models in which the sensitivity to diseconomies of scale are fund-specific and funds have bargaining power over investors.
Keywords: Mutual funds, skill, scale, value added, nonparametric estimation, large panel, error-in-variable bias
JEL Classification: G11, G12, C14, C33, C58
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