The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration

Satyajit Chatterjee and Burcu Eyigungor

No 20-29, Working Papers from Federal Reserve Bank of Philadelphia

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 flow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have a 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 (search for similar items in EconPapers)
JEL-codes: E22 E43 E44 G32 G33 G34 (search for similar items in EconPapers)
Pages: 33
Date: 2020-07-30
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-mac and nep-sbm
Note: Supersedes Working Paper 19-18
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:88451

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DOI: 10.21799/frbp.wp.2020.29

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