IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/88451.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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 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.

Suggested Citation

  • Satyajit Chatterjee & Burcu Eyigungor, 2020. "The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration," Working Papers 20-29, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:88451
    DOI: 10.21799/frbp.wp.2020.29
    Note: Supersedes Working Paper 19-18
    as

    Download full text from publisher

    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2020/wp20-29.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.21799/frbp.wp.2020.29?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. David Autor & David Dorn & Lawrence F. Katz & Christina Patterson & John Van Reenen, 2017. "Concentrating on the Fall of the Labor Share," American Economic Review, American Economic Association, vol. 107(5), pages 180-185, May.
    2. Arellano, Cristina & Bai, Yan & Zhang, Jing, 2012. "Firm dynamics and financial development," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 533-549.
    3. Gita Gopinath & Şebnem Kalemli-Özcan & Loukas Karabarbounis & Carolina Villegas-Sanchez, 2017. "Capital Allocation and Productivity in South Europe," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1915-1967.
    4. Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055-1107.
    5. Dean Corbae & Pablo D’Erasmo, 2021. "Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics [Does Industry-wide distress Affect Defaulted Firms? Evidence from Creditor Recoveries]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2239-2274.
    6. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    7. Cristina Arellano & Yan Bai & Patrick J. Kehoe, 2019. "Financial Frictions and Fluctuations in Volatility," Journal of Political Economy, University of Chicago Press, vol. 127(5), pages 2049-2103.
    8. Emmanuel Farhi & Francois Gourio, 2018. "Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 147-250.
    9. Ran Duchin, 2010. "Cash Holdings and Corporate Diversification," Journal of Finance, American Finance Association, vol. 65(3), pages 955-992, June.
    10. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    11. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    12. Barry Eichengreen, 2015. "Secular Stagnation: The Long View," American Economic Review, American Economic Association, vol. 105(5), pages 66-70, May.
    13. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    14. Steven J. Davis & John Haltiwanger & Ronald S. Jarmin & C.J. Krizan & Javier Miranda & Alfred Nucci & Kristin Sandusky, 2009. "Measuring the Dynamics of Young and Small Businesses: Integrating the Employer and Nonemployer Universes," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 329-366, National Bureau of Economic Research, Inc.
    15. Ander Perez-Orive & Andrea Caggese, 2017. "Capital Misallocation and Secular Stagnation," 2017 Meeting Papers 382, Society for Economic Dynamics.
    16. Urban Jermann & Vincenzo Quadrini, 2012. "Macroeconomic Effects of Financial Shocks," American Economic Review, American Economic Association, vol. 102(1), pages 238-271, February.
    17. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    18. Hugo Hopenhayn & Julian Neira & Rish Singhania, 2022. "From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share," Econometrica, Econometric Society, vol. 90(4), pages 1879-1914, July.
    19. Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "Financial Integration, Financial Development, and Global Imbalances," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 371-416, June.
    20. Paul Gompers & Josh Lerner & David Scharfstein, 2005. "Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999," Journal of Finance, American Finance Association, vol. 60(2), pages 577-614, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Satyajit Chatterjee & Burcu Eyigungor, 2023. "The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 132-157, April.
    2. Satyajit Chatterjee & Burcu Eyigungor, 2019. "The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World," Working Papers 19-18, Federal Reserve Bank of Philadelphia.
    3. Satyajit Chatterjee & Burcu Eyigungor, 2023. "The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 132-157, April.
    4. Sylvain Catherine & Thomas Chaney & Zongbo Huang & David Sraer & David Thesmar, 2022. "Quantifying Reduced‐Form Evidence on Collateral Constraints," Journal of Finance, American Finance Association, vol. 77(4), pages 2143-2181, August.
    5. Ivan Jaccard & Frank Smets, 2020. "Structural Asymmetries and Financial Imbalances in the Eurozone," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 73-102, April.
    6. Gianluca Benigno & Luca Fornaro & Martin Wolf, 2019. "The global financial resource curse," Economics Working Papers 1803, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2023.
    7. Iván Alfaro & Nicholas Bloom & Xiaoji Lin, 2024. "The Finance Uncertainty Multiplier," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 577-615.
    8. Poeschl, Johannes, 2023. "Corporate debt maturity and investment over the business cycle," European Economic Review, Elsevier, vol. 152(C).
    9. Ivan Jaccard & Frank Smets, 2020. "Structural Asymmetries and Financial Imbalances in the Eurozone," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 73-102, April.
    10. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    11. Ufuk Akcigit & Sina T. Ates, 2023. "What Happened to US Business Dynamism?," Journal of Political Economy, University of Chicago Press, vol. 131(8), pages 2059-2124.
    12. Perotti, Enrico & Döttling, Robin, 2017. "Secular Trends and Technological Progress," CEPR Discussion Papers 12519, C.E.P.R. Discussion Papers.
    13. Joao Ayres & Gajendran Raveendranathan, 2023. "Firm Entry and Exit during Recessions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 47-66, January.
    14. Ander Perez-Orive & Andrea Caggese, 2017. "Capital Misallocation and Secular Stagnation," 2017 Meeting Papers 382, Society for Economic Dynamics.
    15. Ohdoi, Ryoji, 2024. "Financial shocks to banks, R&D investment, and recessions," Macroeconomic Dynamics, Cambridge University Press, vol. 28(5), pages 999-1022, July.
    16. Ye Li, 2018. "Fragile New Economy: The Rise of Intangible Capital and Financial Instability," 2018 Meeting Papers 1189, Society for Economic Dynamics.
    17. Eggertsson, Gauti B. & Robbins, Jacob A. & Wold, Ella Getz, 2021. "Kaldor and Piketty’s facts: The rise of monopoly power in the United States," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 19-38.
    18. Dean Corbae & Pablo D’Erasmo, 2021. "Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics [Does Industry-wide distress Affect Defaulted Firms? Evidence from Creditor Recoveries]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2239-2274.
    19. Ufuk Akcigit & Sina T. Ates, 2021. "Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(1), pages 257-298, January.
    20. Ernest Liu & Atif Mian & Amir Sufi, 2022. "Low Interest Rates, Market Power, and Productivity Growth," Econometrica, Econometric Society, vol. 90(1), pages 193-221, January.

    More about this item

    Keywords

    Startup rates; leverage; firm dynamics;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:88451. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Beth Paul (email available below). General contact details of provider: https://edirc.repec.org/data/frbphus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.