Abstract

http://ssrn.com/abstract=1941902
 
 

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The Deleveraging of U.S. Firms and Institutional Investors' Role


Roni Michaely


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


Abstract:     
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 for institutional ownership, our evidence suggests a robust negative effect of institutional holdings on leverage. Evidence from a semi-natural experiment, in which CDS introduction provides an exogenous break to leverage clienteles, suggests institutions sort on leverage and prefer lower leverage. Our tests indicate the negative interrelation is four-fold stronger since institutions were incentivized into an active governing role by regulatory reform and that decreasing agency costs is the mechanism driving the interrelation. In counterfactual simulations, we estimate the aggregate leverage of nonfinancial U.S. firms would have been eight percentage points higher today without the influence of institutions.

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

working papers series





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Date posted: October 10, 2011 ; Last revised: October 20, 2014

Suggested Citation

Michaely, Roni and Popadak, Jillian A. and Vincent, Christopher J., The Deleveraging of U.S. Firms and Institutional Investors' Role (June 5, 2014). Available at SSRN: http://ssrn.com/abstract=1941902 or http://dx.doi.org/10.2139/ssrn.1941902

Contact Information

Roni Michaely (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
431 Sage Hall
Ithaca, NY 14853
United States
607-255-7209 (Phone)
607-254-4590 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Michaely/
Interdisciplinary Center (IDC)
P.O. Box 167
Herzliya, 46150
Israel
Jillian A. Popadak
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
Christopher J. Vincent
U.S. Securities and Exchange Commission ( email )
100 F St, NE
Washington, DC 20549
United States
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