Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut

Abstract

This paper explores the hypothesis that the rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades. Using a new measure, we show that intangible capital is the most important firm-level determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together. We then develop a new dynamic dynamic model of corporate cash holdings with two types of productive assets, tangible and intangible capital. Since only tangible capital can be pledged as collateral, a shift toward greater reliance on intangible capital shrinks the debt capacity of firms and leads them to optimally hold more cash in order to preserve financial flexibility. In the model, firms with growth options tend to hold more cash in anticipation of (S,s)-type adjustments in physical capital because they want to avoid raising costly external finance. We show that this mechanism is quantitatively important, as our model generates cash holdings that are up to an order of magnitude higher than the standard benchmark and in line with their empirical averages for the last two decades. Overall, our results suggest that technological change has contributed significantly to recent changes in corporate liquidity management.

The Rise in Corporate Saving and Cash Holding in Advanced Economies:

“…However, our analysis does not directly point to the channel through which R&D affects cash and saving. There is an emerging literature that has proposed different hypotheses for why intangible capital (accumulated among others through innovation) can imply higher cash demand: for example, Falato et al (2013) argue the lack of collateralizability of intangible capital reduces external debt capacity of financially constrained firms, prompting higher cash holding to finance future investment opportunities. The nature of intangible capital in terms of its financing profile or its capitalizability can also have implications for cash holding of the innovating firm, see Döttling et al (2016) and Ma et al (2014)).…”

Multinationals and cash holdings

“…Next, we study the combined impact of global and industry diversification on cash holdings. Morck and Yeung (1991) show that both industrial diversification and international diversification can add value owing to synergies that can be 11 Falato et al (2013) develop a dynamic model of corporate cash holdings that suggests that greater amounts of intangible assets reduce firms' debt capacity and lead them to hold more cash in order to preserve financial flexibility. Also, tangibility of assets has been related to the investment-cash flow sensitivity by Almeida and Campello (2007).…”

Measuring Intangible Capital with Market Prices

“…Corrado, Hulten, and Sichel (2009) allow δ on R&D investments to vary by industry and assume values between 0.2 and 0.6. Falato, Kadyrzhanova, and Sim (2013) assume δ on R&D equals 0.15, and both δ and γ on SG&A to be 0.20.…”

“…39 Hulten (2010, 2014), Corrado, Hulten, and Sichel (2009), Eisfeldt andPapanikolaou (2013, 2014), Falato, Kadyrzhanova, and Sim (2013), Lev and Radhakrishnan (2005), Zhang (2014) and Peters and Taylor (2017). 40 We measure SG&A net of R&D expense (xrd ) and Research and Development in Process (rdip).…”

“…This lack of capitalization reduces the informativeness of accounting book values in explaining market values (e.g., Lev and Zarowin, 1999). In an attempt to resolve this problem, researchers in economics and finance estimate the off-balance sheet intangible capital with accumulated flows of R&D (Bernstein and Nadiri, 1988;Chan, Lakonishok, and Sougiannis, 2001;Hirshleifer, Hsu, and Li, 2013), SG&A (Eisfeldt andPapanikolaou, 2013, 2014;Belo, Lin, and Vitorino, 2014), or both (Falato, Kadyrzhanova, and Sim, 2013;Peters and Taylor, 2017).…”