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Diseconomies of Scale in Active Management: Robust Evidence

Author

Listed:
  • LuboÅ¡ Pástor
  • Robert F. Stambaugh
  • Lucian A. Taylor
  • Min Zhu

Abstract

We take a deeper look at the robustness of evidence presented by Pástor et al. (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.

Suggested Citation

  • LuboÅ¡ Pástor & Robert F. Stambaugh & Lucian A. Taylor & Min Zhu, 2022. "Diseconomies of Scale in Active Management: Robust Evidence," Critical Finance Review, now publishers, vol. 11(3-4), pages 593-611, August.
    • Handle: RePEc:now:jnlcfr:104.00000121
    DOI: 10.1561/104.00000121
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    Keywords

    Returns to scale; Active management; Mutual funds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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