Replaces Working Paper 20-29/R – The Relationship Between Firm Size and Leverage and Its Implications for Firm Entry and Concentration

A variety can die with constant probability, implying that firms with more varieties (larger firms) have lower sales growth variance and, at equilibrium, higher leverage. In this configuration, a drop in the risk-free rate further increases the value of an acquisition for large companies due to their higher leverage: they can borrow (and do borrow) a larger fraction of their future cash flows. The decline drives existing businesses to buy more of the new varieties that are coming into the economy, leading to a lower start-up rate and greater sales concentration.

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