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Informative fund size, managerial skill, and investor rationality

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  • Zhu, Min

Abstract

This paper considers the nature of returns to scale in active management following Pástor et al. (2015) who fail to establish diseconomies of scale at the fund level. Using an enhanced empirical strategy, we find a significant negative impact of fund size on performance. This empirical evidence indicates that fund alpha and fund size are not independent entities. Consequently, skill, rather than being measured by the fund alpha, should be measured by the value that a fund extracts from capital markets. We also show that there exist sophisticated investors who correctly exploit positive net present value investment opportunities.

Suggested Citation

  • Zhu, Min, 2018. "Informative fund size, managerial skill, and investor rationality," Journal of Financial Economics, Elsevier, vol. 130(1), pages 114-134.
    • Handle: RePEc:eee:jfinec:v:130:y:2018:i:1:p:114-134
    DOI: 10.1016/j.jfineco.2018.06.002
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    References listed on IDEAS

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    1. Yan, Xuemin (Sterling), 2008. "Liquidity, Investment Style, and the Relation between Fund Size and Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(3), pages 741-767, September.
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    4. Hyungsik Roger Moon & Peter C. B. Phillips, 2004. "GMM Estimation of Autoregressive Roots Near Unity with Panel Data," Econometrica, Econometric Society, vol. 72(2), pages 467-522, March.
    5. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
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    7. 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.
    8. Berk, Jonathan B. & van Binsbergen, Jules H., 2015. "Measuring skill in the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 118(1), pages 1-20.
    9. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45.
    10. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2012. "Does Mutual Fund Size Matter? The Relationship Between Size and Performance," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 2(1), pages 31-55.
    11. Miguel A. Ferreira & Aneel Keswani & António F. Miguel & Sofia B. Ramos, 2013. "The Determinants of Mutual Fund Performance: A Cross-Country Study," Review of Finance, European Finance Association, vol. 17(2), pages 483-525.
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    More about this item

    Keywords

    Mutual funds; Managerial skill; Diseconomies of scale; Investor rationality;
    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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