U.S. small firms and low interest rates
In this paper, Efraim Benmelech who looks at the net indebtedness, or net leverage of US corporations for the period from 1970 to 2020. In particular, he examines how corporate behaviors change during periods of low interest rates and studies the consequences of lower rates for corporate investment. He finds:
- Many firms engage in both borrowing and cash hoarding during periods of low interest rates. Increased cash holdings by smaller firms is such that since 2019 have a negative net debt. Larger firms, on the other hand, do not exhibit the same patterns of declining net leverage since their cash holdings to assets did not grow at the same rate of the smaller firms. As a result, smaller and riskier firms have very low net leverage ratios;
- Firms are not using the debt they raise to fund investment; instead, especially in recent years, they hoard their borrowing as cash and financial investments;
- It seems that the overall effect of lower rates is to reduce the amount of cash they need to service their debt.
Leverage and the Macroeconomy: Implications of Low Interest Rates for Corporate Debt
Author: Efraim Benmelech
From: Northwestern University
Large U.S. firms and low interest rates
Kroen et al. using data on firm financials and high frequency monetary policy shocks, find that falling interest rates disproportionately benefit industry leaders, especially when the initial interest rate is already low: a fall in r exhibits a stronger pass-through to the borrowing costs of industry leaders relative to industry followers. For example, a 10 basis point decline in r leads to a 5.2 percent relative increase in debt issued, and a 1 percentage point relative rise in the leverage ratio for industry leaders. So how do leader firms take advantage of low interest rates? Kroen et al. find that , they focus on cash acquisitions, which suggests that industry leaders may be more likely to target their rivals when interest rates fall from very low levels.
Empirical evidence presented in this paper suggests that falling rates, especially as rates get close to zero, disproportionately benefit “superstar” firms. The growth of superstar firms and the accompanying decline in competition has been well-recognized in the literature. Our results provide support to the idea that these trends are partly driven by declining interest rates, especially as rates decline to a level close to zero. Therefore, while low interest rates are generally thought to be expansionary, very low interest rates might also have a contractionary impact on the economy via the rise in market concentration.
Falling Rates and Rising Superstars
Authors: Thomas Kroen, Ernest Liu, Atif Mian, Amir Sufi
From: Princeton University, University of Chicago
