DP16376 Diseconomies of Scale in Active Management: Robust Evidence

Author(s): Lubos Pástor, Robert F. Stambaugh, Lucian Taylor, Min Zhu
Publication Date: July 2021
Keyword(s): Active management, diseconomies of scale, Returns to Scale, robust regression
JEL(s): G11, G12, G14, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16376

We take a deeper look at the robustness of evidence presented by Pastor, Stambaugh, and Taylor (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.