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

59 Pages Posted: 6 Nov 2013

See all articles by Antonio Falato

Antonio Falato

Board of Governors of the Federal Reserve System

Dalida Kadyrzhanova

Georgia State University

Jae Sim

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 2013

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.

Keywords: Asset intangibility, debt capacity, risk management, corporate cash hoarding, (S,s) adjustment

JEL Classification: E22, E44, G31, G32

Suggested Citation

Falato, Antonio and Kadyrzhanova, Dalida and Sim, Jae W., Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut (September 2013). FEDS Working Paper No. 2013-67. Available at SSRN: https://ssrn.com/abstract=2350863 or http://dx.doi.org/10.2139/ssrn.2350863

Antonio Falato (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

Dalida Kadyrzhanova

Georgia State University ( email )

J Mack Robinson College of Business
35 Broad St, 12th Floor
Atlanta, GA 30303-3083
United States

Jae W. Sim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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