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Organizational diseconomies in the mutual fund industry

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  • Garavito, Fabian

Abstract

I document how the organizational form of a mutual fund affects its investment strategies. I show that centralized funds tilt their portfolios to hard information companies whereas decentralized funds tilt their portfolios to soft information companies. I also show that the investments of decentralized (centralized) mutual funds in soft (hard) information companies outperform those of centralized (decentralized) funds. Moreover, decentralized funds show ability to forecast soft information companies’ future returns and a disability at forecasting hard information companies’ future returns. On the other hand, centralized funds do not seem to be able to forecast the returns of hard information companies, but they show disability at forecasting hard information companies’ future returns. The results corroborate the main predictions of Stein (2002). The results also shed light on the increase in demand for large stocks and the positive relationship between performance of portfolio concentration documented in the literature.

Suggested Citation

  • Garavito, Fabian, 2009. "Organizational diseconomies in the mutual fund industry," LSE Research Online Documents on Economics 29302, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:29302
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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