Creating Intangible Capital
62 Pages Posted: 12 Nov 2019 Last revised: 1 Apr 2020
Date Written: March 30, 2020
We propose a new framework modelling intangible capital creation as the joint investment of firm resources and skilled human capital. High-intangible firms require less ex-ante cash spending yet must offer more deferred compensation to retain employees, creating unhedgeable risk. A human capital retention motive for financial prudence thus arises, even absent traditional precautionary needs. Insuring unvested claims requires more net cash in good states and equity rather than debt financing. Because intangibles can be easily diverted, firms need more inside equity and unvested employee claims can exacerbate turnover. The model offers an explanation for recent puzzling trends in corporate financing.
Keywords: Technological change, intangible assets, human capital, corporate leverage, cash holdings, equity grants, deferred equity, share vesting.
JEL Classification: G32, G35, J24, J33
Suggested Citation: Suggested Citation