NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Jonathan Reuter, Eric Zitzewitz

NBER Working Paper No. 16329
Issued in September 2010, Revised in July 2015
NBER Program(s):Aging, Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w16329

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