Returns to Scale Among Corporate Bond Mutual Funds

68 Pages Posted: 13 Mar 2019 Last revised: 19 Jun 2020

Date Written: May 23, 2020


I document a (within-fund) hump-shaped relation between fund size and subsequent fund performance among U.S. corporate bond mutual funds. When funds are small, they exhibit increasing returns to scale but when they become large, they exhibit decreasing returns to scale. This sharply contrasts with the previous finding of decreasing returns to scale among equity mutual funds. Further, I show that the nature of trading cost in the corporate bond market --- in particular, a U-shaped relation between trade size and unit trading cost at the corporate bond level --- is relevant for explaining hump-shaped returns to scale. Interpreting these empirical patterns is not straightforward, though. In a rational expectations framework, we expect a fund's net alpha always to be zero and hence, no time-series relation between fund size and subsequent fund alpha. To help interpret the empirical findings, I propose a dynamic model in which investors learn about a fund's ability to manage its trading cost from its past returns. The evolution of investors' beliefs provides a source of variation in fund size and further, in fund alpha in equilibrium over time.

Keywords: Corporate Bond Mutual Funds, Returns to Scale, Trading Costs, Investors' Behavior

Suggested Citation

Yan, Zhen, Returns to Scale Among Corporate Bond Mutual Funds (May 23, 2020). Available at SSRN: or

Zhen Yan (Contact Author)

Cornerstone Research ( email )

699 Boylston St.
Boston, MA 02116
United States

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