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Implicit Guarantees and Risk Taking: Evidence from Money Market Funds

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  • Marcin Kacperczyk
  • Philipp Schnabl

Abstract

A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual funds. Our identification strategy exploits a large, exogenous expansion in risk-taking opportunities of money market funds during the period of August 2007 to August 2008. We find that a fund's response to the expansion depends on its sponsor's ability to provide implicit guarantees: Funds sponsored by financial institutions with higher equity take on less risk than those sponsored by financial institutions with lower equity. Moreover, fund sponsors with higher equity are more likely to provide financial support to their funds during a market-wide run in September 2008. The difference in risk taking disappears once implicit guarantees by fund sponsors are replaced with an explicit government guarantee. Overall, our findings suggest that implicit guarantees may reduce, rather than increase, risk taking.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17321.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17321

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  1. Nicola Gennaioli & Andrei Shleifer, 2009. "What Comes to Mind," NBER Working Papers 15084, National Bureau of Economic Research, Inc.
  2. Stavros Panageas, 2009. "Bailouts, the Incentive to Manage Risk, and Financial Crises," NBER Working Papers 15058, National Bureau of Economic Research, Inc.
  3. Acharya, Viral V & Schnabl, Philipp & Suarez, Gustavo, 2012. "Securitization Without Risk Transfer," CEPR Discussion Papers 8769, C.E.P.R. Discussion Papers.
  4. Kristopher Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul Willen, 2008. "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 69-159.
  5. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
  6. Marcin Kacperczyk & Amit Seru, 2007. "Fund Manager Use of Public Information: New Evidence on Managerial Skills," Journal of Finance, American Finance Association, vol. 62(2), pages 485-528, 04.
  7. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "On the Industry Concentration of Actively Managed Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 60(4), pages 1983-2011, 08.
  8. Gary Gorton, 2009. "Information, Liquidity, and the (Ongoing) Panic of 2007," American Economic Review, American Economic Association, vol. 99(2), pages 567-72, May.
  9. Ritter, Jay R. & Zhang, Donghang, 2007. "Affiliated mutual funds and the allocation of initial public offerings," Journal of Financial Economics, Elsevier, vol. 86(2), pages 337-368, November.
  10. Burcu Duygan-Bump & Patrick Parkinson & Eric Rosengren & Gustavo A. Suarez & Paul Willen, 2013. "How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility," Journal of Finance, American Finance Association, vol. 68(2), pages 715-737, 04.
  11. Stijn Van Nieuwerburgh & Hanno Lustig & Bryan Kelly, 2011. "Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees," 2011 Meeting Papers 1285, Society for Economic Dynamics.
  12. Gopalan, Radhakrishnan & Nanda, Vikram & Seru, Amit, 2007. "Affiliated firms and financial support: Evidence from Indian business groups," Journal of Financial Economics, Elsevier, vol. 86(3), pages 759-795, December.
  13. Chen, Qi & Goldstein, Itay & Jiang, Wei, 2010. "Payoff complementarities and financial fragility: Evidence from mutual fund outflows," Journal of Financial Economics, Elsevier, vol. 97(2), pages 239-262, August.
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Cited by:
  1. Viral V. Acharya & Nada Mora, 2012. "Are Banks Passive Liquidity Backstops? Deposit Rates and Flows during the 2007-2009 Crisis," NBER Working Papers 17838, National Bureau of Economic Research, Inc.
  2. Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2013. "A Model of Shadow Banking," Journal of Finance, American Finance Association, vol. 68(4), pages 1331-1363, 08.

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