Declining Interest Rates and Firm Dynamics: Falling Startups and Rising Concentration

Bigger COMPUSTAT firms (by sales) have lower coefficient of variation of sales and higher leverage ratios. This pattern is explained using a model of firm growth and entry 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 lower coefficient of variation of sales and higher leverage ratios. A lower risk-free rate benefits larger firms more as they are more able to borrow, leading to lower startup rates and greater concentration of sales in large firms.