Money Market Funds and Shareholder Dilution



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    • Department of Economics, Princeton University. I wish to thank Raymond D. Hill, Dwight Jaffee, Michael L. Katz, Albert S. Kyle, Randolph M. Lyon, and an anonymous referee for helpful comments. This research was supported in part by a grant from the Sloan Foundation to the Economics Department, Princeton University.


This paper analyzes the effects of a share valuation technique, amortized cost valuation, on institutional money market funds (MMFs) and their investors. The possibility of arbitrage between securities priced at market value and amortized MMFs is investigated. It is found that significant dilution has taken place as a result of this valuation technique. Losses per share have been about 10 basis points per year. Evidence that arbitrageurs will take advantage of a misvaluation of the MMF and cause losses to other shareholders may suggest that some investors should reconsider the desirability of amortized MMFs for their investments.