Working Paper: NBER ID: w16329
Authors: Jonathan Reuter; Eric Zitzewitz
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.
Keywords: mutual funds; performance; diseconomies of scale; regression discontinuity
JEL Codes: G14; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| small changes in fund returns (G11) | significant changes in Morningstar ratings (G24) |
| significant changes in Morningstar ratings (G24) | significant increases in fund inflows for funds just above the rating thresholds (G23) |
| fund inflows for funds just above the rating thresholds (G23) | future returns (G17) |
| diseconomies of scale (F12) | low levels of performance persistence among actively managed funds (G23) |