Critical Finance Review > Vol 11 > Issue 3-4

Diseconomies of Scale in Active Management: Robust Evidence

Luboš Pástor, University of Chicago Booth School of Business, and NBER, and CEPR, USA AND National Bank of Slovakia, Slovakia, lubos.pastor@chicagobooth.edu , Robert F. Stambaugh, Wharton School of the University of Pennsylvania, and NBER, USA, stambaugh@wharton.upenn.edu , Lucian A. Taylor, Wharton School of the University of Pennsylvania, USA, luket@wharton.upenn.edu , Min Zhu, Business School, University of Queensland, Australia, m.zhu@business.uq.edu.au
 
Suggested Citation
Luboš Pástor, Robert F. Stambaugh, Lucian A. Taylor and Min Zhu (2022), "Diseconomies of Scale in Active Management: Robust Evidence", Critical Finance Review: Vol. 11: No. 3-4, pp 593-611. http://dx.doi.org/10.1561/104.00000121

Publication Date: 10 Aug 2022
© 2022 Luboš Pástor, Robert F. Stambaugh, Lucian A. Taylor and Min Zhu
 
Subjects
 
Keywords
G11G23J24
Returns to scaleActive managementMutual funds
 

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In this article:
1. Introduction 
2. Data Errors Play no Role 
3. Robust Regressions Confirm Our Results 
4. Pitfalls in Removing Influential Observations 
5. Robustness of DRS to Dropping Extreme Returns 
6. Conclusions 
References 

Abstract

We take a deeper look at the robustness of evidence presented by Pástor et al. (2015) and Zhu (2018), who find that an actively managed mutual fund’s returns relate negatively to both fund size and the size of the active mutual fund industry. When we apply robust regression methods, we confirm both studies’ inferences about scale diseconomies at the fund and industry levels. Moreover, data errors play no role, as both studies’ results are insensitive to applying various error screens and using alternative return benchmarks. We reject constant returns to scale even after dropping 25% of the most extreme return observations. Finally, we caution that asymmetric removal of influential observations delivers biased conclusions about diseconomies of scale.

DOI:10.1561/104.00000121