Download this Paper Open PDF in Browser

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

66 Pages Posted: 10 Oct 2011 Last revised: 6 Dec 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: 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 (Popadak) 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)

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 J. Vincent

U.S. Securities and Exchange Commission ( email )

100 F St, NE
Washington, DC 20549
United States

Paper statistics

Downloads
1,191
rank
13,905
Abstract Views
5,185