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
Date Written: 2019-03-14
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: Suggested Citation