Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry
61 Pages Posted: 28 Dec 2017 Last revised: 27 Jan 2020
Date Written: January 25, 2020
How does the structure of financial intermediaries’ liabilities affect their asset holdings? We investigate a 2014 change in money market fund regulation that forced institutional prime funds’ liabilities to change from constant to floating net asset value, making them less “money-like.” Subsequently, safer funds closed. The remaining funds experienced an increase in the flow-to-performance sensitivity and responded by taking more risk. Consequently, low credit risk issuers receive less funding from US money market funds. 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: Suggested Citation