Creating Intangible Capital

Abstract

We model intangible assets as created through the joint investment of firm resources and skilled human capital. High-intangible firms demand less upfront debt financing and instead grant more deferred compensation to reward and retain critical human capital. Deferred claims expose employees to risk, but firms can provide insurance by committing to maintain financial slack. This retention motive is especially crucial in good states when competition for human capital is intense, unlike traditional precautionary savings that insure against bad states. Large deferred compensation claims also encourage a unique form of insider moral hazard, which can be overcome by a lower insider stake in the firm. Innovative projects are more likely to succeed when the firm establishes a reputation over time for rewarding human capital, which is itself an intangible asset.

Keywords: Technological change, intangible assets, human capital, corporate leverage, cash holdings, equity grants, deferred equity, share vesting

JEL Classification: G32, G35, J24, J33