Scale and Performance in Active Management are Not Negatively Related

Critical Finance Review, forthcoming

60 Pages Posted: 13 Dec 2018 Last revised: 22 Sep 2021

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

Date Written: December 4, 2018

Abstract

We revisit the nature of returns to scale following Pástor, Stambaugh, and Taylor (2015). Using replicated versions of their domestic equity fund sample, we confirm their negative and significant relation between industry scale and performance. However, upon closer examination we find the diseconomies of scale at the industry level result is an artifact of data errors that comprise less than 0.05% of the sample―168 out of 332,516 observations―that occurred most often in the year 2000. We are unable to find industry level diseconomies of scale in the post 2001 era. A major source of these errors is the incorrect use of Morningstar’s current performance benchmarks to measure historical return performance. We confirm the non-result findings using Fama-French three-factor adjusted returns, which are not subject to benchmarking errors.

Keywords: Replication, Returns to scale, Mutual funds, Active management, Passive management, Data errors, Index funds, Influential observations, Outliers, Diseconomies

JEL Classification: G10, G11, G12

Suggested Citation

Adams, John C. and Hayunga, Darren K. and Mansi, Sattar, Scale and Performance in Active Management are Not Negatively Related (December 4, 2018). Critical Finance Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=3295799 or http://dx.doi.org/10.2139/ssrn.3295799

John C. Adams (Contact Author)

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

Virginia Polytechnic Institute & State University ( email )

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