Banks have much more leverage than nonbanks. In this article, we use a joint sample of banks and nonbanks between 1965 and 2013 to analyze the determinants of this leverage difference. We find that a single factor, asset risk, is able to explain up to 90% of this difference. Banks’ assets consist of a diversified portfolio of nonbank debt. Therefore, banks have much lower asset risk than do nonbanks. Because asset risk is a major determinant of capital structure choice, this factor is able to explain a large fraction of the difference between bank and nonbank leverage.

We document empirical evidence that both hedge fund (HF) and private equity fund (PE) investments are driven by corporate governance improvements, but address different types of agency conflicts. Whereas HFs focus on firms without a controlling shareholder, in particular family shareholders, PEs invest in firms with low managerial ownership. Both appear to address free cash flow problems differently. Aiming at increasing dividends, HFs tend to use commitment devices that can be implemented over a short horizon. PEs are inclined to longer-term strategies: they target firms that are particularly well suited for leverage increases because of low expected financial distress costs.

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