Investors’ appetite for money-like assets: the money market fund industry after the 2014 regulatory reform

This paper uses a quasi-natural experiment to estimate the premium investors are willing to pay to hold money-like assets. The 2014 SEC reform of the money market fund (MMF) industry reduced the money-likeness only of prime MMFs, by increasing the information sensitivity of their shares, and left government MMFs unaffected. As a result, investors fled from prime to government MMFs, with total outflows exceeding $1 trillion. By comparing investors’ response to the regulatory change with past episodes of industry dislocation (for example, the 2008 MMF run), we highlight the difference between a desire to preserve money-likeness and a simple flight to safety. Using a difference-in-differences design that exploits the differential treatment of prime and government MMFs, as well as institutional and retail share classes, we estimate the premium for money-likeness to be 20 basis points for retail investors and 28 basis points for institutional ones (who have been more affected by the regulation). Using family specialization as an instrument for fund yields, we are able to identify the elasticity of substitution between prime and government institutional MMF shares: the regulation caused the elasticity to decrease from 0.50 to 0.11.