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