Abstract

We study the origins and life cycles of firms that reach the top 1 percent of the size distribution and show that they are central for quantifying the aggregate effects of financial frictions. Using longitudinal data, we document that future top firms make sizable capital investments early in life, exhibit strongly backloaded profits, and heavily rely on external financing. By contrast, firms in the bottom 99 percent operate with little capital early on and exhibit fairly flat profit shares over their life cycle. To interpret these patterns, we develop a firm dynamics model in which high-growth-potential firms face high input-specific fixed costs and rely on forward-looking financing to sustain backloaded profits. Quantitatively, the aggregate losses from financial frictions are driven primarily by distortions that hinder the entry and survival of future top firms.