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
Corporate leverage is important for economic stability and decreased markedly in the U.S. since 1992. In contrast to press coverage of hedge funds increasing corporate debt, we find increases in institutional ownership, primarily by mutual funds, account for part of this deleveraging. We use implied mutual fund trades constructed from individual-investor flows as exogenous variation in institutional ownership. Supporting the hypothesis institutions contributed to the deleveraging, our estimates increase significantly after regulatory reforms incentivized stronger governance, and an agency mechanism explains the interrelation. Counterfactual simulations indicate aggregate leverage would have been eight percentage points higher today without institutions' influence.
Number of Pages in PDF File: 65
Keywords: Capital Structure, Institutional Investors, Mutual Funds, Individual Investors, Corporate Governance, Agency Costs, Corporate Leverage, Credit Default Swaps, Arm's Length Debt, Bank Loans, Covenants
JEL Classification: G3, G32, G31, G23, E44
Date posted: October 10, 2011 ; Last revised: June 30, 2015
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