Explaining the Size of the Mutual Fund Industry Around the World

Abstract

This paper studies the mutual fund industry in 56 countries and tests various hypotheses to explain the extent to which this innovative form of financial intermediation has flourished. Consistent with related findings from the law and economics literature, the mutual fund industry is larger in countries with stronger rules, laws, and regulations, specifically where mutual fund investors' rights are better protected. The industry is smaller in countries where barriers to entry are higher, measured by the effort required to set up a new fund. The fund industry is larger in countries with wealthier and more educated populations, and where the industry itself is older. The fund industry is also larger in countries in which defined contribution pension plans are more prevalent and where trading costs are lower. These results indicate that laws and regulations, supply-side, and demand-side factors simultaneously affect the size of the mutual fund industry. These factors are also related to the recent growth rates of the fund industry across nations.