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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31335
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| Title: | Implicit Guarantees and Risk Taking: Evidence from Money Market Funds |
| Authors: | Kacperczyk, Marcin
Schnabl, Philipp |
| Issue Date: | 1-Dec-2011 |
| Series/Report no.: | FIN-11-013 |
| 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. |
| URI: | http://hdl.handle.net/2451/31335 |
| Appears in Collections: | Finance Working Papers
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