The Firm Size and Leverage Relationship and its Implications for Entry and Concentration in a Low Interest Rate World

37 Pages Posted: 14 Mar 2019 Last revised: 29 Apr 2020

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Burcu Eyigungor

Federal Reserve Bank of Philadelphia

Date Written: 2019-03-14

Abstract

Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of sales.

Keywords: Startup rates, leverage, firm dynamics

JEL Classification: E22, E43, E44, G32, G33, G34

Suggested Citation

Chatterjee, Satyajit and Eyigungor, Burcu, The Firm Size and Leverage Relationship and its Implications for Entry and Concentration in a Low Interest Rate World (2019-03-14). FRB of Philadelphia Working Paper No. 19-18, Available at SSRN: https://ssrn.com/abstract=3352716 or http://dx.doi.org/10.21799/frbp.wp.2019.18

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
United States
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HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Burcu Eyigungor

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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