Diseconomies of Scale in Active Management: Robust Evidence
21 Pages Posted: 16 Jul 2021
Date Written: July 13, 2021
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: Suggested Citation