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. 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