A Century of Capital Structure: The Leveraging of Corporate America

Abstract

Unregulated US corporations dramatically increased their debt usage over the past century. Aggregate leverage — low and stable before 1945 — more than tripled between 1945 and 1970 from 11% to 35%, eventually reaching 47% by the early 1990s. The median firm in 1946 had no debt, but by 1970 had a leverage ratio of 31%. This increase occurred in all unregulated industries and affected firms of all sizes. Changing firm characteristics are unable to account for this increase. Rather, changes in government borrowing, macroeconomic uncertainty, and financial sector development play a more prominent role. Despite this increase among unregulated firms, a combination of stable debt usage among regulated firms and a decrease in the fraction of aggregate assets held by regulated firms over this period resulted in a relatively stable economy-wide leverage ratio during the 20th century.

Keywords: capital structure, leverage, financial policy, government debt, taxes, bankruptcy costs, financial sector

JEL Classification: G32, E62, E44