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The Deleveraging of U.S. Firms and Institutional Investors' Role

62 Pages Posted: 10 Oct 2011 Last revised: 1 Nov 2017

Jillian (Popadak) Grennan

Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Roni Michaely

Cornell University - Cornell Tech NYC

Christopher J. Vincent

U.S. Securities and Exchange Commission

Date Written: October 31, 2017

Abstract

U.S. corporate leverage has decreased markedly since 1992. We find greater institutional ownership explains this deleveraging trend. Without institutions' influence, total leverage would be eight percentage points higher today. Detection of this relationship was elusive since researchers often combine all years and institutions. Yet legal barriers to institutional activism persisted until 1992. And while hedge funds may advocate for more debt, other institutional investors drive the deleveraging. We find active institutions with longer investment horizons drive the deleveraging. Their desire for change balances short-term gains with long-term financial distress. Supporting this conclusion, we find high-leverage and high-distress firms deleverage more, and they offset debt reductions with other agency-reducing incentives (i.e., covenants and dividends).

Keywords: Corporate Leverage; Institutional Investors; Passive Institutions; Active Institutions; Hedge Funds; Corporate Governance; Shareholder Power; U.S. Securities and Exchange Commission; Agency Costs; Financial Distress; Financial Stability; Capital Structure; Debt Structure

JEL Classification: G3, G32, G34, G38, K22, E44

Suggested Citation

Grennan, Jillian (Popadak) and Michaely, Roni and Vincent, Christopher J., The Deleveraging of U.S. Firms and Institutional Investors' Role (October 31, 2017). Available at SSRN: https://ssrn.com/abstract=1941902 or http://dx.doi.org/10.2139/ssrn.1941902

Jillian Grennan (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Roni Michaely

Cornell University - Cornell Tech NYC ( email )

2 West Loop Rd
New York, NY 10044
United States

Christopher Vincent

U.S. Securities and Exchange Commission ( email )

100 F St, NE
Washington, DC 20549
United States

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