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Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers

Published online by Cambridge University Press:  14 September 2018

Ping McLemore
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Abstract

Using mergers as shocks to fund size, I analyze the return-to-scale property of mutual funds. I find that acquiring funds’ performance deteriorates after experiencing a positive shock in size resulting from mergers, and liquidity plays an important role in the negative relationship between size and performance. I also find that the decline in performance is not due to higher performance prior to the merger, nor driven by higher integration costs after the event. These findings are consistent with mutual funds having decreasing returns to scale and thus provide empirical evidence that supports the theoretical model of Berk and Green (2004).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019 , pp. 1683 - 1711
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

I thank Jennifer Conrad (the editor) and an anonymous referee for their helpful comments and guidance. I am also grateful for the helpful suggestions from Nick Bollen, David Brown, Scott Cederburg, Keisuke Hirano, Kathleen Kahle, Eric Kelley, Sandy Klasa, Ľuboš Pástor, Blake Phillips, Matthew Serfling, Richard Sias, S. “Vish” Viswanathan, seminar participants at the University of Arizona, the Federal Reserve Bank of Richmond, Rensselaer Polytechnic Institution, the University of Central Florida, and conference participants at the 2014 Midwest Finance Association Annual Meeting, the 2014 Southwestern Finance Association Annual Meeting, the 2014 Financial Management Association Doctoral Student Consortium, the 2014 Financial Management Association Annual Meeting, the 2014 Southern Financial Association Annual Meeting, and the 2015 American Finance Association Annual Meeting. The views expressed herein are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of Richmond or the Federal Reserve System. All errors are my own.

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