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

62 Pages Posted: 10 Oct 2011 Last revised: 21 Jun 2017

Roni Michaely

Johnson@Cornell Tech, Cornell University

Jillian Popadak Grennan

Duke University - Fuqua School of Business

Christopher J. Vincent

U.S. Securities and Exchange Commission

Date Written: June 20, 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

Michaely, Roni and Grennan, Jillian Popadak and Vincent, Christopher J., The Deleveraging of U.S. Firms and Institutional Investors' Role (June 20, 2017). Available at SSRN: https://ssrn.com/abstract=1941902 or http://dx.doi.org/10.2139/ssrn.1941902

Roni Michaely (Contact Author)

Johnson@Cornell Tech, Cornell University ( email )

111 8th Avenue #302
New York, NY 10011
United States

Jillian Popadak Grennan

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Christopher J. Vincent

U.S. Securities and Exchange Commission ( email )

100 F St, NE
Washington, DC 20549
United States

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