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 trades generated from mutual fund outflows as an instrument for institutional ownership, our evidence suggests a significant 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 institutional investors prefer lower leverage. The effect advancing from institutional holdings to leverage is more pronounced than from leverage to institutional holdings. The negative relationship is stronger in firms with high agency costs and in firms with active investors. Our tests suggest increases in institutional ownership coupled with a more active investment style brought about by the 1992 SEC regulatory reform accounts for part of the decline in aggregate leverage for U.S. firms.
Number of Pages in PDF File: 38
Keywords: Capital Structure, Institutional Investors, Aggregate Leverage Trends, Mutual Funds, Corporate Governance, Credit Default Swaps
JEL Classification: G3, G32, G31, G23, E44working papers series
Date posted: October 10, 2011 ; Last revised: June 9, 2014
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