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

Published online by Cambridge University Press:  18 June 2021

Ramin P. Baghai ,
Mariassunta Giannetti Open the ORCID record for Mariassunta Giannetti [Opens in a new window]  and
Ivika Jäger
Ramin P. Baghai
Affiliation:
Stockholm School of Economics, Centre for Economic Policy Research (CEPR), and European Corporate Governance Institute (ECGI)ramin.baghai@hhs.se
Mariassunta Giannetti*
Affiliation:
Stockholm School of Economics, CEPR, and ECGI
Ivika Jäger
Affiliation:
Aalto University School of Businessivika.jager@aalto.fi
*
mariassunta.giannetti@hhs.se (corresponding author)
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Abstract

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How does the structure of financial intermediaries’ liabilities affect their asset holdings? We investigate the consequences of the 2014 money market fund (MMF) reform, which imposed redemption gates and liquidity fees on prime MMFs and forced prime funds marketed to institutional investors to switch from constant to floating net asset value. These changes made prime MMFs’ liabilities less money-like. As a consequence, the affected MMFs experienced an increase in flow–performance sensitivity and started taking more risks. In addition, the total funding provided by MMFs to the corporate sector, and especially to safer issuers, has decreased.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 5 , August 2022 , pp. 1771 - 1804
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for comments and suggestions made by Jack Bao, Sergey Chernenko, Jennifer Conrad (the editor), Marco Di Maggio, Emily Gallagher (the referee), Javier Gil-Bazo, Gary Gorton, Pekka Honkanen, Wei Jiang, Veronika Pool, Otto Toivanen, and Malcom Wardlaw. We also thank seminar and conference participants at the 2nd World Symposium on Investment Research, the 2018 European Finance Association Meetings, the 2019 Western Finance Association Meetings, the 2019 Financial Intermediation Research Society Meetings, the University of Maryland and Federal Reserve Board Third Conference on Short-Term Funding Markets, the Banque de France, the University of Bristol, the University of Exeter, the University of Zurich, the 2018 EuroFIT Workshop, the Bank of Finland/CEPR conference “Money in the Digital Age,” the European Central Bank workshop “Money Markets, Monetary Policy Implementation, and Central Bank Balance Sheets,” the European Central Bank workshop “Monetary Policy, Macroprudential Policy and Financial Stability,” and the First Endless Summer Conference on Financial Intermediation and Corporate Finance for helpful comments. Baghai acknowledges financial support from the Nasdaq Nordic Foundation. Giannetti acknowledges financial support from the Bank of Sweden Tercentenary Foundation. Jäger acknowledges financial support from the Jacob Palmstiernas Foundation. The authors have no relevant or material financial interests that relate to the research described in this article.

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