Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry
58 Pages Posted: 28 Dec 2017 Last revised: 7 May 2020
Date Written: May 6, 2020
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: Suggested Citation