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Measuring the financial soundness of U.S. firms, 1926-2012

Author

Listed:
  • Andrew Atkeson
  • Andrea L. Eisfeldt
  • Pierre-Olivier Weill

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

  • Andrew Atkeson & Andrea L. Eisfeldt & Pierre-Olivier Weill, . "Measuring the financial soundness of U.S. firms, 1926-2012," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:484
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    References listed on IDEAS

    as
    1. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    3. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.
    4. repec:bla:jfinan:v:59:y:2004:i:2:p:831-868 is not listed on IDEAS
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    Cited by:

    1. Colin Ellis, 2014. "Break-even maturity as a guide to financial distress," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(4), December.
    2. Daly, Kevin & Batten, Jonathan A. & Mishra, Anil V. & Choudhury, Tonmoy, 2019. "Contagion risk in global banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).

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    Keywords

    Business cycles;

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