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Liquidity, Investment Style, and the Relation between Fund Size and Fund Performance

Published online by Cambridge University Press:  06 April 2009

Xuemin (Sterling) Yan
Xuemin (Sterling) Yan
Affiliation:
yanx@missouri.edu, University of Missouri-Columbia, College of Business, Department of Finance, 427 Cornell Hall, Columbia, MO 65211.
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Abstract

Using stock transactions data along with detailed stockholdings for a comprehensive sample of U.S. actively managed equity mutual funds from 1993 to 2002, this paper empirically examines the effect of liquidity and investment style on the relation between fund size and fund performance. Consistent with Chen, Hong, Huang, and Kubik (2004), I find a significant inverse relation between fund size and fund performance. Further, this inverse relation is stronger among funds that hold less liquid portfolios. The inverse relation between fund size and fund performance is also more pronounced among growth and high turnover funds that tend to have high demands for immediacy. Overall, this paper's findings suggest that liquidity is an important reason why fund size erodes performance.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 3 , September 2008 , pp. 741 - 767
Copyright
Copyright © School of Business Administration, University of Washington 2008

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