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:     
Corporate leverage plays a critical role in the stability of the economy and has decreased markedly in the U.S. since 1992. In contrast to press coverage of vocal hedge funds increasing corporate debt levels, we find increases in institutional ownership, primarily by mutual funds, account for part of this deleveraging. We use implied mutual fund trades generated from individual-investor flows as a source of exogenous variation to estimate this interrelation. Our estimates increase four-fold after SEC regulatory reform incentivized passive 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: 62

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


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Date posted: October 10, 2011 ; Last revised: April 9, 2015

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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