Zera, Stephen Paul

A pre-determined percentage of the assets of mutual funds is extracted from each portfolio's value on a daily basis to cover operating expenses. The nature of the relationship between these fund operating expenses and fund size is the focus of this dissertation. A negative relationship is shown to exist between mutual fund operating expense percentages and mutual fund size. Next, a double-log estimating equation is utilized to generate a measure of the elasticity of mutual fund operating expenses with respect to mutual fund size. This expense-size elasticity (ESE) is estimated to be.961 for the entire cross-sectional sample, indicating that a one percent increase in fund size is associated with a.961% increase in fund operating expenses. Next, the elasticity of mutual fund operating expenses with respect to mutual fund size is calculated for each of five fund size categories. The ESE of the largest fund size category is shown to not differ in a statistically significant manner from those of the smaller categories of mutual fund size. ESEs are then calculated for various investment objective categories and are shown to differ in a statistically significant manner. ESEs also differ between load and no-load funds as well as between open-end and closed-end funds. The lack of statistically significant differences between the ESEs of various size categories is also evident in an analysis performed on a cross-sectional sample of mutual fund families. Further, evidence of the lack of significance of fund size in explaining variation in fund-specific ESES is found in an analysis of time series data for mutual funds in existence from 1976 through 1994.