Diseconomies of Scale in Active Management: Robust Evidence

21 Pages Posted: 16 Jul 2021

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert F. Stambaugh

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

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Min Zhu

University of Queensland

Date Written: July 13, 2021

Abstract

We take a deeper look at the robustness of evidence presented by Pastor, Stambaugh, and Taylor (2015) and Zhu (2018), who find that an actively managed mutual fund's returns relate negatively to both fund size and the size of the active mutual fund industry. When we apply robust regression methods, we confirm both studies' inferences about scale diseconomies at the fund and industry levels. Moreover, data errors play no role, as both studies' results are insensitive to applying various error screens and using alternative return benchmarks. We reject constant returns to scale even after dropping 25% of the most extreme return observations. Finally, we caution that asymmetric removal of influential observations delivers biased conclusions about diseconomies of scale.

Keywords: returns to scale, diseconomies of scale, active management, robust regression

JEL Classification: G11, G12, G14, G23

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F. and Taylor, Lucian A. and Zhu, Min, Diseconomies of Scale in Active Management: Robust Evidence (July 13, 2021). Available at SSRN: https://ssrn.com/abstract=3886275 or http://dx.doi.org/10.2139/ssrn.3886275

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
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773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

Min Zhu

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/min-zhu

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