How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach

66 Pages Posted: 7 Sep 2010 Last revised: 13 Feb 2022

See all articles by Jonathan Reuter

Jonathan Reuter

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Eric Zitzewitz

Dartmouth College; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: September 2010

Abstract

The level of diseconomies of scale in asset management has important implications for tests of manager skill and the expected level of performance persistence. To identify the causal impact of fund size on future returns, we exploit the fact that small differences in returns can cause discrete changes in Morningstar ratings that, in turn, generate discrete differences in size. Despite robust evidence that Morningstar ratings increase fund size, our regression discontinuity estimates yield little evidence that fund size erodes returns. Consequently, any downward bias in standard estimates of performance persistence due to diseconomies of scale is likely to be small.

Suggested Citation

Reuter, Jonathan and Zitzewitz, Eric W., How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach (September 2010). NBER Working Paper No. w16329, Available at SSRN: https://ssrn.com/abstract=1672582

Jonathan Reuter (Contact Author)

Boston College - Department of Finance ( email )

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Eric W. Zitzewitz

Dartmouth College ( email )

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HOME PAGE: http://www.dartmouth.edu/~ericz

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