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

Roni Michaely, Jillian Popadak and Christopher Vincent
Authors registered in the RePEc Author Service: Jillian Grennan

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Finance; Financial Stability; Corporate Leverage; Institutional Investors; Mutual Funds; Hedge Funds; Corporate Governance; Agency Costs; Capital Structure; Debt Structure (search for similar items in EconPapers)
JEL-codes: E44 G3 G32 G34 G38 K22 (search for similar items in EconPapers)
Date: 2015-08-15
New Economics Papers: this item is included in nep-cfn, nep-ger and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:66128

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