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

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