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

58 Pages Posted: 26 Jun 2018

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

Roberto Steri

University of Lausanne; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2018

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. We develop and estimate a dynamic model of corporate cash holdings with two productive assets, tangible and intangible capital. Since only tangible capital can be pledged as collateral, a shift toward intangible capital shrinks the debt capacity of firms and leads them to hold more cash in order to preserve financial flexibility. This mechanism is quantitatively powerful: the estimated model fits well the secular rise of corporate cash ratios in U.S. data; the model estimates point to a steady decline in tangibility, but other key estimated parameters, such as equity issuance costs, cash flow volatility, and operating costs, stay relatively stable for most of the past decades; the model generates no rise in cash for the 1980s and 1990s under a counterfactual parametrization that sets intangible capital to be constant, and it takes implausibly large increases in other parameters to match the rise in cash under this counterfactual parametrization; rising intangible capital has a much stronger impact on cash than a decrease in pleadgeability of assets as collateral for debt financing. Our analysis suggests that technological change has contributed significantly to the secular changes in corporate liquidity management by U.S. firms.

Keywords: Intangible Assets, Debt Capacity, Risk Management, Corporate Cash Holdings

JEL Classification: E22, E44, G31, G32

Suggested Citation

Falato, Antonio and Kadyrzhanova, Dalida and Sim, Jae W. and Steri, Roberto, Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut (June 18, 2018). Available at SSRN: https://ssrn.com/abstract=3198030 or http://dx.doi.org/10.2139/ssrn.3198030

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

Roberto Steri

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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