Measuring the Financial Soundness of U.S. Firms, 1926-2012

49 Pages Posted: 12 Jul 2013 Last revised: 23 Jun 2021

See all articles by Andrew Atkeson

Andrew Atkeson

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Andrea L. Eisfeldt

UCLA Anderson School of Management

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Date Written: July 2013

Abstract

Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms' financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms' financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.

Suggested Citation

Atkeson, Andrew G. and Eisfeldt, Andrea L. and Weill, Pierre-Olivier, Measuring the Financial Soundness of U.S. Firms, 1926-2012 (July 2013). NBER Working Paper No. w19204, Available at SSRN: https://ssrn.com/abstract=2292825

Andrew G. Atkeson (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrea L. Eisfeldt

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Pierre-Olivier Weill

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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