Falling Rates and Rising Superstars
Do low interest rates contribute to the rise in market concentration? Using data on firm financials and high frequency monetary policy shocks, we find that falling interest rates disproportionately benefit industry leaders, especially when the initial interest rate is already low. Falling rates raise the valuation of industry leaders relative to industry followers and this effect snowballs as the interest rate approaches zero. There are multiple channels through which falling rates disproportionately benefit industry leaders: (i) the cost of borrowing falls more for industry leaders, (ii) industry leaders are able to raise more debt, increase leverage, and buyback more shares, and (iii) capital investment and acquisitions increase more for industry leaders. All three of these effects also snowball as the interest rate approaches zero. The findings provide empirical support to the idea that extremely low interest rates and the rise of superstar firms are connected.
We thank Keelan Beirne, Sebastian Hanson, Julio Roll, and Michael Varley for excellent research assistance, the Julis Rabinowitz Center for Public Policy and Finance at Princeton for financial support, and participants at U.C. Berkeley Haas and Northwestern University Kellogg for comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.