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

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

Roni Michaely

The University of Hong Kong; ECGI

Christopher J. Vincent

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

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: or

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

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK

ECGI ( email )

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

No contact information is available for Christopher J. Vincent

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