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

66 Pages Posted: 10 Oct 2011 Last revised: 6 Dec 2017

See all articles by Jillian Grennan

Jillian Grennan

Santa Clara University, Leavey School of Business; Santa Clara University School of Law; University of California, Berkeley, Haas School of Business, Institue for Business and Social Impact

Roni Michaely

The University of Hong Kong; ECGI

Christopher J. Vincent

Federal Housing Finance Agency

Date Written: December 5, 2017

Abstract

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

Grennan, Jillian and Michaely, Roni and Vincent, Christopher J., The Deleveraging of U.S. Firms and Institutional Investors' Role (December 5, 2017). Available at SSRN: https://ssrn.com/abstract=1941902 or http://dx.doi.org/10.2139/ssrn.1941902

Jillian Grennan (Contact Author)

Santa Clara University, Leavey School of Business ( email )

Santa Clara, CA 95053
United States

Santa Clara University School of Law ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

University of California, Berkeley, Haas School of Business, Institue for Business and Social Impact

Berkeley, CA 94720
United States

Roni Michaely

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Christopher J. Vincent

Federal Housing Finance Agency ( email )

400 7th Street SW
Washington, DC 20552
United States

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