The Evolution of Financial Fragility: A Quantile Decomposition of Firm Balance Sheets

40 Pages Posted: 10 Mar 2021

See all articles by Leila Davis

Leila Davis

University of Massachusetts Boston

Joao de Souza

University of Massachusetts Boston

Gonzalo Hernández

Pontifical University Javeriana Inicio

Date Written: January 23, 2021

Abstract

The post-1980 period has seen an across-the-distribution increase in the cash holdings of U.S. non-financial corporations and falling indebtedness among firms at the bottom 60% of the distribution. These trends are puzzling, given concurrent growth in the share of firms that generate insufficient cash flows to service their financial obligations. We reconcile these trends using quantile decompositions, which show that observed changes across balance sheets reflect firms entering and exiting the corporate sector, rather than the behavior of continuing firms. This finding, which is particularly strong among financially fragile firms, suggest that 'churning', due in particular to changing IPO behavior, is a key mechanism through which financial norms have been disseminated in the last four decades.

Keywords: financial fragility, competition, cash holdings, leverage

JEL Classification: E03, G30, L1

Suggested Citation

Davis, Leila and de Souza, Joao and Hernández, Gonzalo, The Evolution of Financial Fragility: A Quantile Decomposition of Firm Balance Sheets (January 23, 2021). Available at SSRN: https://ssrn.com/abstract=3771962 or http://dx.doi.org/10.2139/ssrn.3771962

Leila Davis (Contact Author)

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

Joao De Souza

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States
6086952606 (Phone)
02125 (Fax)

Gonzalo Hernández

Pontifical University Javeriana Inicio ( email )

Carrera 7 No. 40-62
Bogotá
Colombia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
23
Abstract Views
152
PlumX Metrics