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Fund Size, Transaction Costs and Performance: Size Matters!

Author

Listed:
  • Howard W. H. Chan

    (Department of Finance, The University of Melbourne, VIC 3010.)

  • Robert W. Faff

    (Department of Accounting and Finance, Monash University, Clayton, VIC 3800.)

  • David R. Gallagher

    (Australian School of Business, The University of New South Wales, Sydney, NSW 2052 and McCombs School of Business, The University of Texas at Austin, TX 78712, USA.)

  • Adrian Looi

    (Australian School of Business, The University of New South Wales, Sydney, NSW 2052 and Barclays Global Investors, Sydney, NSW, 2000.)

Abstract

Recent studies find evidence that small funds outperform large funds. This fund size effect is commonly hypothesized to be caused by transaction costs. Due to the lack of transactions data, prior studies have investigated the transaction costs theory indirectly. Our study, however, analyses the daily transactions of active Australian equity managers and finds aggregate market impact costs incurred by large managers are significantly greater than those incurred by small managers. Furthermore, we show large managers exhibit preferences for trade package formation and portfolio characteristics consistent with transaction cost intimidation. We analyse the interaction between transaction cost intimidation and the fund size effect, and document that large managers pursuing a highly active trading strategy suffer more from fund size, than large funds following a more passive strategy. This suggests the fund size effect is related to transaction costs, as trading activity is a good proxy for expected market impact. Finally, based on a simulation experiment, we find that transaction cost intimidation is at least as important as the increase in market impact costs due to fund size.

Suggested Citation

  • Howard W. H. Chan & Robert W. Faff & David R. Gallagher & Adrian Looi, 2009. "Fund Size, Transaction Costs and Performance: Size Matters!," Australian Journal of Management, Australian School of Business, vol. 34(1), pages 73-96, June.
    • Handle: RePEc:sae:ausman:v:34:y:2009:i:1:p:73-96
    DOI: 10.1177/031289620903400105
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    References listed on IDEAS

    as
    1. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
    2. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
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    Cited by:

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    2. Samar Farid & Hayam Wahba, 2022. "The effect of fund size on mutual funds performance in Egypt," Future Business Journal, Springer, vol. 8(1), pages 1-11, December.
    3. Danny Yeung, 2012. "The Impact of Institutional Ownership: A Study of the Australian Equity Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2012.
    4. Danny Yeung, 2012. "The Impact of Institutional Ownership: A Study of the Australian Equity Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 11, July-Dece.
    5. Emawtee Bissoondoyal‐Bheenick & Robert Brooks & Hung Xuan Do, 2023. "Risk Analysis of Pension Fund Investment Choices," Abacus, Accounting Foundation, University of Sydney, vol. 59(3), pages 872-898, September.
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    8. Robert E. Marks, 2009. "Anatomy of a Credit Crisis," Australian Journal of Management, Australian School of Business, vol. 34(1), pages 0-26, June.

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