The Deleveraging of U.S. Firms and Institutional Investors' Role
66 Pages Posted: 10 Oct 2011 Last revised: 6 Dec 2017
Date Written: December 5, 2017
The leverage of unregulated U.S. corporations has decreased markedly since 1992. We find greater power by institutional investors explains part of this deleveraging trend. Removing legal barriers enhanced institutions' influence and enabled them to induce firms to move toward more efficient leverage ratios. These leverage changes reflect an updated balance of trade-offs that incorporates how institutions with effective monitoring power offset traditional trade-offs (e.g., disciplinary benefits of debt). Supporting these conclusions, we find: leverage ratios move toward optimal ratios; high-distress firms deleverage more; and firms implement alternative agency-reducing devices (e.g., covenants). In total, corporate leverage would be 8 percentage points higher today without institutional investors influence.
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: Suggested Citation