Financing Intangible Capital
67 Pages Posted: 19 Aug 2015 Last revised: 15 Jun 2022
Date Written: October 2, 2016
Firms finance intangible investment through employee compensation contracts. In a dynamic model in which intangible capital is embodied in a firm's employees, we analyze the firm's optimal decisions of intangible investment, employee compensation contracts, and financial leverage. Employee financing is achieved by delaying wage payments in the form of future claims. We document that intangible capital investment is highly correlated with employee financing, but not with debt issuance or regular equity refinancing. In the quantitative analysis, we show that this new channel of employee financing can explain the cross-industry differences in leverage and financing patterns.
Keywords: Intangible Capital, Limited Commitment, Equity Financing, Debt Capacity
JEL Classification: G32, G35, E22
Suggested Citation: Suggested Citation