Skill, Scale, and Value Creation in the Mutual Fund Industry
122 Pages Posted: 31 Oct 2018 Last revised: 3 Jun 2021
Date Written: April 4, 2021
We develop a flexible and bias-adjusted approach to jointly examine skill, scalability, and value added across individual funds. We find that skill and scalability (i) vary substantially across funds, and (ii) are strongly related as great investment ideas are difficult to scale up. The combination of skill and scalability produces a value added that (i) is positive for the majority of funds, and (ii) approaches its optimal level after an adjustment period possibly due to investors' learning. These results are consistent with theoretical models in which funds are skilled and able to extract economic rents from capital markets.
Keywords: Mutual funds, skill, scale, value added, large panel, error-in-variable bias
JEL Classification: G11, G12, C14, C33, C58
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