Churning and profitability in the U.S. corporate sector

Abstract

This paper establishes that entry and exit stabilize the top half of the profitability distribution in the post-1970 U.S. economy. We, first, document stability in the distribution of total profits earned on tangible, intangible, and financial capital. Whereas a narrower measure of returns on tangible capital, instead, suggests rising dispersion, it fails to capture post-1970 growth in intangible and financial assets. Second, we use quantile decompositions to show that churning—specifically, exit for cause—regulates median and top-end profitability. Thus, the process by which competition drives out unprofitable firms acts to stabilize profit rates in the U.S. economy.