Investor Information Acquisition and Money Market Fund Risk Rebalancing during the 2011–2012 Eurozone Crisis*

We study investor redemptions and portfolio rebalancing decisions of prime money market mutual funds (MMFs) during the Eurozone crisis. We find that sophisticated investors selectively acquire information about MMFs’ risk exposures to Europe, which leads managers to withdraw funding from information-sensitive European issuers. That is, MMF managers, particularly those serving the most sophisticated investors, selectively adjust their portfolio risk exposures to avoid information-sensitive European risks, while maintaining or increasing risk exposures to other regions. This mechanism helps to explain the occurrence of selective “dry-ups” in debt markets where delegation is common and returns to information production are usually low. (JEL G01, G21, G23) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.