Performance-Based Attrition and Decreasing Returns to Scale
The School of Economics and Finance invites you to a seminar presented by Associate Professor Min Zhu from University of Queensland.
Author: Min Zhu and Jiacui Li
Abstract
In interpreting fund flows and performance in active management, the explanatory power of the Berk and Green (2004) framework depends on the magnitude of decreasing returns to scale (DRS)---the degree to which fund size erodes performance. Existing DRS estimators, most notably the recursive demeaning estimator, produce puzzlingly large estimates. We show that such estimates overstate DRS due to performance-based attrition: funds are more likely to close after poor performance. We develop a new estimator that isolates within-fund DRS effects by controlling for between-fund skill-size matching while remaining robust to performance-based attrition. When applied to U.S. active equity mutual funds, our estimator delivers DRS estimates that are statistically significant but economically plausible, roughly an order of magnitude lower than some previous estimates.
About Speaker
Min Zhu is an Associate Professor of Finance at the University of Queensland Business School. She is also a co-lead of the UQ Business School's Digital Finance Research Hub. Her research focuses on investments, household finance and digital finance. She has published in leading international journals such as the Journal of Financial Economics, The Accounting Review, and the Journal of Financial Econometrics. Min has led and participated in grant projects attracting over $1 million dollars in public and industry funding, including as lead investigator on an ARC Discovery Project.