Falling Rates and Rising Superstars

Using high frequency interest rate shocks, we find that falling rates in a low interest rate environment favor industry leaders. A fall in interest rate near the zero lower bound leads to a stronger decline in the borrowing rate for industry leaders, who also borrow more, invest more aggressively, and acquire assets at a faster pace. This advantage from falling rates enjoyed by industry leaders diminishes in a higher rate environment. We estimate a “competition-neutral” nominal federal funds rate of about four percentage points, a level at which industry leaders and followers are impacted equally from an interest rate change.