Munich Personal RePEc Archive

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

Michaely, Roni and Popadak, Jillian and Vincent, Christopher (2015): The Deleveraging of U.S. Firms and Institutional Investors’ Role.

[img]
Preview
PDF
MPRA_paper_66128.pdf

Download (663kB) | Preview

Abstract

Corporate leverage has decreased markedly in the U.S. since 1992. In contrast to press coverage of hedge funds increasing debt, increases in institutional investments, primarily by mutual funds, account for part of this deleveraging. We use implied mutual fund trades constructed from individual-investor flows as exogenous variation in institutional ownership for estimation. Supporting the hypothesis institutions contributed to deleveraging, our estimates increase significantly after regulatory reforms incentivized stronger institutional governance. Firms deleverage by reducing debt and transitioning to debt associated with enhanced monitoring and efficiency. Counterfactual simulations indicate aggregate leverage would have been eight percentage points higher without institutions' influence.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.