Of Interest? Estimating the Average Interest Rate on Debt across Firms and Over Time

We use tax data from the Longitudinal Business Database to estimate the firm-level average
interest rate on liabilities. The mean of this measure has similar time series properties to official
statistics on the business borrowing rate, while also enabling detailed disaggregation across
different firm types. We document significant variation in interest rate across firms in different
industries, and across firms with different apparent borrowing risk. Finally, we compare firms
self-reported views on whether they are finance-constrained to an estimated firm-specific
interest rate premium, showing that: finance-constrained firms have higher interest rate premia
than unconstrained firms; and that at least part of this difference in premia is explained by firm level
differences in risk between constrained and unconstrained firms.