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

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  • Jonathan Reuter
  • Eric Zitzewitz

Abstract

Although mutual funds exhibit little ability to persistently outperform their peers, money flows into funds with the highest past returns. Berk and Green (2004) rationalize these patterns by arguing that more-skilled managers manage more assets but, because of diseconomies of scale, generate the same expected returns as less-skilled managers. To identify the causal impact of fund size on performance, we exploit the fact that small differences in mutual fund returns can cause discrete changes in Morningstar ratings that, in turn, generate discrete differences in mutual fund size. Our regression discontinuity estimates yield little evidence that fund size erodes fund returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16329.

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Date of creation: Sep 2010
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Handle: RePEc:nbr:nberwo:16329

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  1. Jonathan Reuter & Eric Zitzewitz, 2006. "Do ADS Influence Editors? Advertising and Bias in the Financial Media," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(1), pages 197-227, 02.
  2. Diane Del Guercio & Paula A. Tkac, 2001. "Star power: the effect of Morningstar ratings on mutual fund flows," Working Paper, Federal Reserve Bank of Atlanta 2001-15, Federal Reserve Bank of Atlanta.
  3. Guido Imbens & Thomas Lemieux, 2007. "Regression Discontinuity Designs: A Guide to Practice," NBER Working Papers 13039, National Bureau of Economic Research, Inc.
  4. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 57-82, March.
  5. Massa, Massimo & Reuter, Jonathan & Zitzewitz, Eric, 2010. "When should firms share credit with employees? Evidence from anonymously managed mutual funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 95(3), pages 400-424, March.
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Cited by:
  1. Daniel Schmidt & Frank Schmielewski, 2012. "Consumer reaction on tumbling funds - Evidence from retail fund outflows during the financial crisis 2007/2008," Working Paper Series in Economics, University of Lüneburg, Institute of Economics 228, University of Lüneburg, Institute of Economics.
  2. Lubos Pastor & Robert F. Stambaugh & Lucian A. Taylor, 2014. "Scale and Skill in Active Management," Working Papers, Becker Friedman Institute for Research In Economics 2014-003, Becker Friedman Institute for Research In Economics.
  3. Ariadna Dumitrescu & Javier Gil-Bazo, 2012. "Market Frictions, Investor Sophistication and Persistence in Mutual Fund Performance," ESADE Working Papers, ESADE Business School, Group for Research in Economics and Finance (GREF) 2013-1, ESADE Business School, Group for Research in Economics and Finance (GREF), revised Mar 2013.
  4. Wu, Youchang & Wermers, Russ & Zechner, Josef, 2012. "Governance and shareholder value in delegated portfolio management: The case of closed-end funds," CFR Working Papers, University of Cologne, Centre for Financial Research (CFR) 12-11, University of Cologne, Centre for Financial Research (CFR).

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