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
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)
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com, nep-ent, nep-fdg, nep-mac and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2022/wp22-07.pdf (text/html)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden
Journal Article: The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:93850
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().