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 has decreased markedly in the U.S. since 1992. In contrast to press coverage of hedge funds increasing debt, increases in institutional investments, 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 for estimation. Supporting the hypothesis institutions contributed to deleveraging, our estimates increase significantly after regulatory reforms incentivized stronger institutional governance. Firms deleverage by reducing debt and transitioning to debt associated with enhanced monitoring and efficiency. Counterfactual simulations indicate aggregate leverage would have been eight percentage points higher without institutions' influence.
Number of Pages in PDF File: 67
Keywords: Finance, Financial Stability, Corporate Leverage, Institutional Investors, Mutual Funds, Hedge Funds, Corporate Governance, Agency Costs, Capital Structure, Debt Structure
JEL Classification: G3, G32, G34, G38, K22, E44
Date posted: October 10, 2011 ; Last revised: October 24, 2015
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