US Corporate Leverage: Developments in 1987 and 1988

The years 1987 and 1988 saw some dramatic developments in U.S. financial markets. The 1987 stock market crash was followed in 1988 by intense corporate restructuring activity, including a record volume of stock repurchases and leveraged buyouts.I Meanwhile the use of debt financing by U.S. corporations continued to increase, even among firms not involved in ownership changes or major restructurings.
The increase in corporate leverage has caused some concern to policymakers responsible for the stability of the U.S. financial system. Federal Reserve Board Chairman Alan Greenspan testified in January 1989 to the Senate Finance Committee that “the spate of mergers, acquisitions, leveraged buyouts, share repurchases, and divestitures in recent years is a significant development…. While the evidence suggests that the restructurings of the 1980’s probably are improving, on balance, the efficiency of the American economy, the worrisome and possibly excessive degree of leveraging associated with this process could create a new set of problems for the financial system.”
This report updates the evidence in our earlier Brookings Panel paper on the changing capital structure of the U.S. corporate sector.3 As in that paper, our first objective is to characterize in detail the entire distribution of leverage across industries and individual firms. By using firm-specific information available on the COMPUSTAT data tapes, we go beyond the usual focus on aggregate numbers. We also assess the potential social costs and benefits of the increased leverage of recent years.

Ben S. Bernanke, John Y. Campbell, and Toni M. Whited

Brookings Institution

Winter 1990

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