Why Have Losses Become More Common at Large U.S. Firms? Falling Operating Profits, Rising Debt

• In Event: 4140 - Debt, Finance, and Financialization

Abstract

In recent decades, corporate profits have risen while household incomes for the vast majority of Americans have stagnated. In this paper, I document a trend that offers a new way of making sense of this paradox of “profits without prosperity” (Lazonick 2014): while profits have risen on average, the variability of these profits has also risen, such that firms have also become more likely to fail to turn a profit. Firms with negative income are likely to take drastic cost-cutting measures like laying off workers or freezing wage increases, and hence this trend of rising losses has likely made American workers more economically insecure. Yet this increase in losses has received little scholarly attention. I begin to fill this gap by examining losses the 316 largest U.S. firms since the 1950s. Losses began to rise at these firms during the 1970s, and while the initial surge in losses was relatively widespread, since 2000 the largest and most successful firms became increasingly insulated from losses. In the second part of the paper, I investigate two potential explanations for this rise in losses: falling rates of operating profits and rising levels of corporate debt. Using regression analyses, I find evidence that both declining operating profit rates and rising debt help explain a portion of the increase in losses, but rising debt seems to be a stronger explanatory factor. This suggests rising corporate debt has hurt the ability of large firms to consistently generate a profit, contributing to economic instability and worker insecurity.

Author

• Matthew Stimpson, UC Berkeley