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.

Capital Misallocation and Secular Stagnation

“…Similarly, Falato, Kadyrzhanova, and Sim (2014) show empirically that the relation between reliance on intangible capital and cash holdings is stronger among …rms for which …nancing frictions are more severe.…”

“…A shift toward a stronger reliance on intangible capital will be captured as a decrease in . 31 Firms cannot issue equity.…”

“…At the same time, the developed world has experienced a technological change toward a stronger importance of information technology and of knowledge, human and organizational capital, which has gradually reduced the reliance on physical capital (Corrado and Hulten (2010a)) and has been linked to a signi…cant decrease in corporate net borrowing (Falato, Kadyrzhanova, and Sim (2014), Döttling and Perotti (2015)). 1 This paper argues that the increased reliance on intangible capital and the low real interest rates interact to hurt capital reallocation and reduce productivity and output growth.…”

Mortgage Finance and Technological Change

“…Recent evidence relates the rising use of intangibles to falling corporate leverage (Bates et al, 2009;Falato et al, 2013). 3 .…”

“…Physical capital is produced by firms, while intangible capital is produced by some skilled workers who invest their human capital in innovative firms (akin to the innovative producers of intermediate goods in endogenous 1 Falato et al (2013) define intangibles as knowledge capital, organizational capability and computerized information and software, while Lev (2000) classifies intangibles as innovation-related, human and organizational capital. 2 While public knowledge is by nature non excludable, the return to worker skills cannot be promised for moral hazard reasons.…”