Aggregate leverage for US nonfinancial publicly traded firms more than tripled
from 10% in 1920 to 35% in 1970. Including an increase in nondebt liabilities,
the aggregate balance sheet liabilities increased from 25% in the 1930s to more
than 65% by 1990. These trends are in contrast to regulated US firms. The
authors identify macroeconomic factors that alter a firm’s propensity to
use debt and find that firm characteristics have no such effect.
The authors provide a complete picture of US capital structure and firms’
financial policies over the past century. They also discuss a broad-based, steep
increase in the corporate leverage ratio of every unregulated industry.
The authors identify sharp differences between regulated and unregulated sectors as
well as distinct similarities among unregulated industries and firms of different
sizes. Changes in the broader economic and institutional environments have played an
important role in explaining the changes in corporate leverage. Little of the
increase in leverage over the past century is attributable to changes in firm
How Is This Article Useful to Practitioners?
From 1920 to 1945, leverage among unregulated firms was fairly stable and relatively
low. From 1946 to 1970, leverage increased steadily and significantly, but
post-1970, leverage has remained stable. Much of the increase in financial leverage
was because of an increase in long-term debt. Increased usage of short-term debt
began in the late 1960s, and nondebt liabilities (e.g., pensions and accounts
payable) began rising in 1970.
Much of the increase in leverage over this period was because of the substitution of
debt for preferred equity. Preferred stock was more than 13% of aggregate assets in
the early 1920s, dropping to 2% of assets in 1960. This shift toward a greater
reliance on debt as a funding source resulted from an increase in corporate tax
rates, the growth of financial intermediaries, and a large reduction in government
The increase in leverage over 1945–1970 was an economy-wide phenomenon shared
by firms of all sizes in all unregulated industries. But the authors’
regression results indicate that only a small portion of the leverage increase is
explained by variation in firm characteristics. Their empirical analysis shows a
significant negative relationship between corporate and government net issuing
The authors find no significant positive relationship between tax rates and aggregate
leverage. In the case of higher recapitalization costs, corporate leverage may not
respond immediately to an increase in tax rates, but it may affect the choice of
security the next time a firm wants to raise external capital.
How Did the Authors Conduct This Research?
Using the time frame 1920–2010, the authors consider all nonfinancial firms
listed on (1) the NYSE since 1925, (2) the AMEX since 1962, and (3) NASDAQ since
1972. They obtain stock market data from the CRSP, accounting data from Compustat,
and other data from Moody’s Industrial Manual.
The authors bifurcate these companies into regulated and unregulated on the basis of
the industry-specific regulatory environment, restricting the scope of their study
to the unregulated sector. They first estimate cross-sectional relationships between
leverage and firm characteristics over 1920–1945 and predict each firm’s
leverage ratio after 1945. Compared with the actual leverage ratios, their results
indicate that only a small portion of the leverage increase can be explained by firm
characteristics. They analyze long-term trends in aggregate leverage ratios for
unregulated firms and leverage trends across the entire distribution of firms of all
sizes and in all industries. The authors compare firm characteristics and leverage
trends across all NYSE, AMEX, and NASDAQ firms.
Although the authors analyze and discuss various aspects of the increase in corporate
leverage over the past century, they do not examine the implications of tax rates,
monetary policies, and the regulatory environment in great detail. The period
1945–1970, during which aggregate leverage tripled, coincides with the time
frame of the Bretton Woods system (1944–1971) and that relationship should be
analyzed in future research.