Persistent Operating Losses and Corporate Financial Policies

Abstract

Coincident with a rise in intangible investment, operating losses have become substantially more prevalent, persistent, and greater in magnitude since 1970. Loss firms now make up over 30% of the Compustat universe and such losses continue for a median of four years. Firms with negative operating cash flows account for more than half of the rise in average cash balances over the sample period. Further, firms exhibiting operating losses are now the majority of equity issuers. These companies issue frequently, primarily through private placements, and use the funds raised in the issue to cover current and subsequent operating losses. We conclude that the immediate and expected ongoing liquidity needs of public firms with persistent operating losses have substantially altered corporate financial policies.

Keywords: Cash Flow, Cash, Equity Issuance

JEL Classification: D22, G30