Creating Intangible Capital
57 Pages Posted: 12 Nov 2019 Last revised: 15 Dec 2019
Date Written: December 14, 2019
We propose a framework in which intangible capital is created by the joint investment of firm resources and skilled human capital, reducing ex-ante investment spending. Firms must offer deferred compensation to retain employees, creating unhedgeable risk. A human capital retention motive for financial prudence thus arises also absent traditional precautionary motives. Insuring unvested claims requires more net cash in good states, equity rather than debt financing and payouts via repurchases rather than dividends. As intangibles can be easily diverted, firms need more inside equity, especially under high compensation overhang. The model sheds new light on several recent trends in corporate financing.
Keywords: technological change, intangible assets, cash holdings, human capital, corporate leverage, equity grants, deferred equity, share vesting
JEL Classification: G32, G35, J24, J33
Suggested Citation: Suggested Citation