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

Satyajit Chatterjee () and Burcu Eyigungor ()

No 22-07, 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, acquire new varieties from their inventors, and borrow against the future cash flow of the firm with the option to default. A variety can die with a constant probability, implying that firms with more varieties (bigger firms) have a lower variance of sales growth and, in equilibrium, higher leverage. In this setup, a drop in the risk-free rate increases the value of an acquisition more for bigger firms because of their higher leverage: They can (and do) borrow a larger fraction of their future cash flow. The drop causes existing firms to buy more of the new varieties arriving into the economy, resulting in a lower startup rate and greater concentration of sales.

Keywords: Startup rates; concentration; leverage; firm dynamics (search for similar items in EconPapers)
JEL-codes: E22 E43 E44 G32 G33 G34 (search for similar items in EconPapers)
Pages: 56
Date: 2022-03-17
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com, nep-ent, nep-fdg, nep-mac and nep-sbm
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DOI: 10.21799/frbp.wp.2022.07

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