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Federal Reserve Bank of Philadelphia
Working Papers
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World
Satyajit Chatterjee
Burcu Eyigungor
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.


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Satyajit Chatterjee & Burcu Eyigungor, The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World, Federal Reserve Bank of Philadelphia, Working Papers 19-18, 14 Mar 2019.
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Keywords: Startup rates; leverage; firm dynamics
DOI: 10.21799/frbp.wp.2019.18
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