DP13337 Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness

Author(s): Sebnem Kalemli-Ozcan
Publication Date: November 2018
Date Revised: November 2018
Keyword(s): age, census data, Financial constraints, firm life-cycle, leverage, Short-term debt
JEL(s): E0
Programme Areas: Financial Economics, International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13337

We study the leverage of U.S. firms over their life-cycle and implications for firm growth and responses to shocks. We use a new dataset that matches private firms' balance sheets to U.S. Census Bureau's Longitudinal Business Database (LBD) for the period 2005-2012. A number of stylized facts emerge. First, firm size and leverage are strongly positively correlated for private firms, both in the cross section of firms and over time for a given firm. For public firms, there is a weak negative relation between leverage and size. Second, young private firms borrow more, but firm age has no relation to public firms' leverage. Third, while private firms switch from debt to equity financing as they age, public firms slightly reduce equity financing as they age. Building on this "normal times" benchmark and using the "Great Recession" as a shock to financial conditions, we show that, for private firms, firm size can serve as a good predictor of financial constraints. During the Great Recession, leverage declines for private firms, but not for public firms. We also provide evidence that private firms' growth is positively related to leverage, as they finance their growth during normal times with short-term borrowing, whereas the relationship between leverage and firm growth is negative for public firms. These results suggest that public firms are not financially constrained during normal times or during crisis, but private firms are.