Working Paper: CEPR ID: DP16376
Authors: Lubo Pstor; Robert F. Stambaugh; Lucian Taylor; Min Zhu
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 Codes: G11; G12; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Actively managed mutual fund returns (G23) | Fund size (G23) |
| Actively managed mutual fund returns (G23) | Size of the active mutual fund industry (G23) |
| Fund size (G23) | Actively managed mutual fund returns (G23) |
| Size of the active mutual fund industry (G23) | Actively managed mutual fund returns (G23) |