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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Finance, Financial Stability, Corporate Leverage, Institutional Investors, Mutual Funds, Hedge Funds, Corporate Governance, Agency Costs, Capital Structure, Debt Structure
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G3 - Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation; K - Law and Economics > K2 - Regulation and Business Law > K22 - Business and Securities Law

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