Intangible Assets and Capital Structure

Abstract

A substantial and increasing proportion of corporate assets consists of intangible assets. Despite their growing importance, internally-generated intangible assets, the dominant type, are largely absent from balance sheets and other corporate reports. Consequently, the empirical capital structure research has struggled to evaluate the effects of intangible assets on leverage. High valuation risk and poor collateralizability of some intangible assets — e.g. goodwill, may discourage debt financing. In contrast, so-called identifiable intangible assets may support debt because they are separately identifiable, valuable, and potentially collateralizable, and are instrumental in generating cash flows. Utilizing a recent accounting rule change that allows us to observe granular market-based valuations of intangible assets, we find a strong positive relation between identifiable intangible assets and financial leverage. Overall, identifiable intangible assets support debt financing as much as tangible assets do, in particular in firms that lack abundant tangible assets.

Keywords: Capital structure, financial leverage, identifiable intangible assets, purchase price allocation

JEL Classification: G32, G34