How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach

Abstract The level of diseconomies scale in asset management has important implications for tests manager skill and the expected performance persistence. To identify causal impact fund size on future returns, we exploit fact that small differences returns can cause discrete changes Morningstar ratings that, turn, generate size. Using our regression discontinuity approach, find significantly increase size, but a negligible effect returns. Within Berk Green’s (2004) model, absence meaningful fund-level implies lack persistence arises from skill. Alternatively, may arise competitive pressures outside their model.