Rational Cross-Sectional Differences in Market Efficiency: Evidence
from Mutual Fund Returns
by PAUL H. SCHULTZ
University of Notre Dame - Department of Finance & Business Economics
November 14, 2007
Abstract:
There should be enough inefficiency in the market to allow returns to
security analysis to adequately compensate the marginal investor for
his efforts. Cross-sectional differences in the costs of analysis
imply cross-sectional differences in market efficiency. Small growth
stocks are especially costly to analyze and trade. Hence we would
expect that the returns before expenses that smart investors earn
analyzing these stock to be especially high. Over 1980 - 2006, the
small growth stocks held by active mutual funds earn average abnormal
returns of 0.76% per month. Large value stocks held by funds earn
monthly abnormal returns of only 0.05%.
Keywords: market efficiency, mutual funds, growth stocks, small stocks JEL Classifications: G12, G14, G20
If the conclusions of the paper above are correct (I have not had time to read it yet), actively managed mutual make more sense for small cap growth stocks than for large cap value stocks. I have seen similar research for small cap vs. large cap stocks, ignoring the value/growth dimension.
Keywords: market efficiency, mutual funds, growth stocks, small stocks JEL Classifications: G12, G14, G20
If the conclusions of the paper above are correct (I have not had time to read it yet), actively managed mutual make more sense for small cap growth stocks than for large cap value stocks. I have seen similar research for small cap vs. large cap stocks, ignoring the value/growth dimension.