This paper studies optimal second-best corrective regulation, when some agents/activities cannot be perfectly regulated. H23 : Public Economics→Taxation, Subsidies, and Revenue→Externalities, Redistributive Effects, Environmental Taxes and Subsidies Q58 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Government Policy G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation D62 : Microeconomics→Welfare Economics→Externalities Abstract Funds with price-based LMTs also rebalance their portfolios towards less liquid bonds, which results in lower price fragility among bonds held disproportionally by our sample of Irish-domiciled funds. This difference is stronger among funds with a high sensitivity of flows to past-performance and reflects both higher gross in-flows and lower gross outflows during this episode. ![]() We find that funds with access to price-based tools such as redemption fees or anti-dilution levies experienced lower net outflows in March 2020, as compared to funds with only quantity-based tools such as redemption gates, temporary suspensions or redemption in kind. We employ a unique dataset that reports the availability of different types of LMTs in a sample of Irish-domiciled corporate bond funds. We study the role of liquidity management tools (LMTs) in mitigating financial fragility in investment funds during the COVID-19 market distress. G2 : Financial Economics→Financial Institutions and Services G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors Abstract ![]() The findings highlight the real effects from fire sales arising due to contracting frictions. The erosion in the liquidity positions of exposed firms spills over into real economic activity. These fire sales exert price pressure on the securities of unrelated firms, creating market dislocations. ![]() Following a negative shock to the oil
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