Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry

58 Pages Posted: 28 Dec 2017 Last revised: 7 May 2020

See all articles by Ramin Baghai

Ramin Baghai

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Ivika Jäger

Stockholm School of Economics, Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 6, 2020

Abstract

How does the structure of financial intermediaries’ liabilities affect their asset holdings? We investigate the 2014 money market fund reform that imposed a change in institutional prime funds’ liabilities from constant to floating net asset value, making them less “money-like.” While safer prime funds closed or changed their mandates to become government funds, the remaining prime funds experienced an increase in flow-to-performance sensitivity and responded by taking more risk. Consequently, riskier issuers received more funding from US money market funds, at the expense of safer issuers. These findings indicate that regulation is crucial for liquidity creation and provide evidence for theories highlighting that financial intermediaries’ assets and liabilities are jointly determined.

Keywords: Money-ness; Liquidity; Money Market Funds; Risk Taking; Fund Exit; Regulation

JEL Classification: G1; G28

Suggested Citation

Baghai, Ramin and Giannetti, Mariassunta and Jäger, Ivika, Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry (May 6, 2020). Swedish House of Finance Research Paper No. 18-1. Available at SSRN: https://ssrn.com/abstract=3093519 or http://dx.doi.org/10.2139/ssrn.3093519

Ramin Baghai

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Ivika Jäger

Stockholm School of Economics, Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 11160
Sweden

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