Capital Allocation and the Market for Mutual Funds: Inspecting the Mechanism

42 Pages Posted: 14 Oct 2019

See all articles by Jules H. van Binsbergen

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Jeong Ho (John) Kim

Emory University - Department of Economics

Soohun Kim

Georgia Institute of Technology - Scheller College of Business

Date Written: October 1, 2019

Abstract

We analyze the effects of returns to scale on capital allocation decisions in the mutual fund market by exploiting individual heterogeneity in decreasing returns to scale across funds. We find strong evidence that steeper decreasing returns to scale attenuate flow sensitivity to performance and lead to smaller fund sizes. Our results are consistent with a rational model for active management. Using the model, we argue that a large fraction of capital allocation due to differences in decreasing returns to scale can be plausibly attributed to investors anticipating these effects of scale.

Keywords: Capital Allocation, Mutual Funds, Returns to Scale, Fund Flows

Suggested Citation

van Binsbergen, Jules H. and Kim, Jeong Ho (John) and Kim, Soohun, Capital Allocation and the Market for Mutual Funds: Inspecting the Mechanism (October 1, 2019). Georgia Tech Scheller College of Business Research Paper No. 3462749. Available at SSRN: https://ssrn.com/abstract=3462749 or http://dx.doi.org/10.2139/ssrn.3462749

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

Jeong Ho (John) Kim (Contact Author)

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/kim-john.html

Soohun Kim

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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