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.

Intangible capital, volatility shock, and the value premium

“…34 The monthly rate of physical capital depreciation ( K ) is set to be .01 following Cooper and Haltiwanger (2006) and Zhang (2005), implying 12% per year as is usual in the literature. The share of current R&D expenditure in generating intangible capital is set at .05 at the monthly frequency, largely consistent with Hall, Jaffe, and Trajtenberg (2000) and Falato et al (2013). The fixed cost of production f = .4580 is chosen to match the average book-to-market of the model with that observed the data (e.g., Gomes, 2001).…”

“…Aside from the exact magnitude of the intangible capital stock, it is safe to say that intangible capital is a crucial component of the market price of a firm to the extent that the market price of the firm measures the value of all its different forms of productive capital (e.g., plants, structures, know-how, employee expertise, organization capital, etc.). Data also suggest that U.S. firms have steadily increased the stock of intangible capital over the past 60 years, for example, Hall (2001) and Falato, Kadyrzhanova, and Sim (2013).Recent literature on fluctuating economic uncertainty emphasizes that the impact of temporary volatility shock appears to be salient in the production side of the real economy, for example, Bloom (2009) and Arellano, Bai, and Kehoe (2012). In particular, Bloom (2009) shows that an increase in aggregate volatility is associated with an increase in the dispersion of firm profit growth, firm stock return, total factor productivity, and GDP forecast.…”

“…Aside from the exact magnitude of the intangible capital stock, it is safe to say that intangible capital is a crucial component of the market price of a firm to the extent that the market price of the firm measures the value of all its different forms of productive capital (e.g., plants, structures, know-how, employee expertise, organization capital, etc.). Data also suggest that U.S. firms have steadily increased the stock of intangible capital over the past 60 years, for example, Hall (2001) and Falato, Kadyrzhanova, and Sim (2013).…”

Tax-AdjustedqModel with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives

“…12 Similarly, z structure j;t is computed as a weighted average of the present value of depreciation allowances across all structural assets. 9 Several recent studies use firm-level R&D or selling, general, and administrative (SG&A) expenses to measure intangible assets (Eisfeldt and Papanikolaou 2013;Falato, Kadyrzhanova, and Sim 2013;Chen 2014); however, SG&A does not have a breakdown of investment by asset types. 10 For the book value of physical assets, we experiment with different measurements used in the literature and choose to present results based on the book value of plant, property, and equipment.…”

The Global Rise of Corporate Saving

“…All standard errors are clustered by country. Falato, Kadyrzhanova, and Sim (2013) argue that the secular trend in U.S. corporate cash holdings reflects the rising importance of intangible capital as an input of production. If intangible capital is more difficult to pledge as collateral, firms reduce the cost of financing externally their intangible capital accumulation by increasing their cash holdings.…”