On the Size of the Active Management Industry

Lubos Pastor and Robert F. Stambaugh

Journal of Political Economy, 2012, vol. 120, issue 4, 740 - 781

Abstract: We argue that active management's popularity is not puzzling despite the industry's poor track record. Our explanation features decreasing returns to scale: As the industry's size increases, every manager's ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (82)

Downloads: (external link)
http://dx.doi.org/10.1086/667987 (application/pdf)
http://dx.doi.org/10.1086/667987 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
Working Paper: On the Size of the Active Management Industry (2010)
Working Paper: On the Size of the Active Management Industry (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/667987

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().