The Secular Decline in Private Firm Leverage
Using firm-level administrative tax data on the 43% of business liabilities in the United States tied to privately held firms, we document dramatic reductions in leverage since the Great Recession. Leverage for the average private firm fell fifteen percent between 2004 and 2018. In contrast, leverage among public firms rose during this period. The decline in leverage among private firms is inconsistent with theories that suggest firm leverage tracks pro-cyclical credit market conditions. Younger and smaller private firms see especially large declines in leverage, and we find that reduced leverage among private firms is correlated with lower investment. Our findings have important implications for theories on how firm leverage and investment relate to economic fluctuations.
The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the Federal Reserve research staff or the Board of Governors. The views expressed in this paper are our own and are not necessarily those of the U.S. Department of the Treasury or the National Bureau of Economic Research.