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 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, E44working papers series
Date posted: October 10, 2011 ; Last revised: October 20, 2014
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