Does the delisting bias really explain the size effect?

• Main Author: TAN, Eng Joo
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Business
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4497
• Institution: Singapore Management University

We develop a new approach for estimating mutual fund performance that controls for both factor model betas and stock characteristics in one measure. Our double adjustment procedure shows that fund returns are significantly related to stock characteristics in the cross section after controlling for risk via factor models. Compared to standard mutual fund performance estimates, the new measure substantially affects performance rankings, with a quarter of funds experiencing a change in percentile ranking greater than ten. Double-adjusted fund performance persists a full nine years after the initial ranking period, much longer than standard performance. Moreover, inference based on the new measure often differs, sometimes dramatically, from that based on traditional performance estimates.