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Diseconomies of Scale in Quantitative and Fundamental Investment Styles

Published online by Cambridge University Press:  11 July 2022

Richard B. Evans Open the ORCID record for Richard B. Evans [Opens in a new window] ,
Martin Rohleder ,
Hendrik Tentesch  and
Marco Wilkens
Richard B. Evans*
Affiliation:
University of Virginia Darden School of Business
Martin Rohleder
Affiliation:
University of Augsburg Faculty of Economics and Business Administration [email protected]
Hendrik Tentesch
Affiliation:
Portfolio Manager for the Firm Tecta Invest GmbH [email protected]
Marco Wilkens
Affiliation:
University of Augsburg Faculty of Economics and Business Administration [email protected]
*
[email protected] (corresponding author)
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Abstract

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We examine diseconomies of scale for two different investment approaches: quantitative and fundamental. Using separate account (SA) data where the investment approach is self-identified, we find that fundamental SAs exhibit greater diseconomies of scale than quantitative SAs. Looking at liquidity costs, we find that quantitative SAs hold more diversified portfolios of higher liquidity stocks than fundamental SAs, thereby reducing their expected liquidity costs. We also find that consistent with lower information processing/hierarchy costs, the speed of information diffusion is higher for quant SAs. Accounting for these differences helps to explain the differences in diseconomies of scale.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2417 - 2445
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Hendrik Bessembinder (the editor), Miguel Ferreira, Wayne Ferson, Juan Pedro Gomez, Viktoriya Lantushenko, Pedro Matos, John O’Brien, Melissa Prado, Otto Randl, Jue Ren, Esad Smajlbegovic, Günter Strobl, Z. Jay Wang, Mungo Wilson (a referee), Rafael Zambrana and participants of the 2017 Southern Finance Association conference, the 2018 Eastern Finance Association conference, the 2018 Financial Management Association European conference, 2019 European Retail Investment conference as well as seminar participants at the Darden School of Business, McIntire School of Commerce, Nova Universidade de Lisboa, University of Hagen, and the Frankfurt School of Finance & Management for very helpful comments and suggestions. All remaining errors are our own.

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