The Deleveraging of U.S. Firms and Institutional Investors' Role
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)
Jillian A. Popadak
Duke University - Fuqua School of Business
Christopher J. Vincent
U.S. Securities and Exchange Commission
June 5, 2014
We find increases in institutional ownership account for declines in leverage over time and across firms. Using implied mutual fund trades generated from individual-investor flows as an instrument, we estimate institutional ownership leads to lower leverage. A semi-natural experiment suggests institutions also sort on lower leverage, but the former effect from institutions to leverage dominates. This interrelation increases four-fold after regulatory reform incentivized institutions into an active governing role, and decreasing agency costs appears as the main mechanism. Counterfactual simulations indicate the aggregate leverage of nonfinancial U.S. firms would have been eight percentage points higher today without institutions' influential role.
Number of Pages in PDF File: 57
Keywords: Capital Structure, Institutional Investors, Aggregate Leverage Trends, Corporate Governance, Agency Costs, Corporate Debt, Credit Default Swaps, Arm's Length Debt
JEL Classification: G3, G32, G31, G23, E44
Date posted: October 10, 2011 ; Last revised: October 22, 2014
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