Sovereign Risk and Intangible Investment

69 Pages Posted: 22 Mar 2021 Last revised: 14 Feb 2023

See all articles by Minjie Deng

Minjie Deng

Simon Fraser University, Department of Economics

Chang Liu

University of Rochester

Date Written: February 15, 2021

Abstract

This paper measures the output and TFP losses from sovereign risk, considering firm-level intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the recent sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. This reallocation affects aggregate output and TFP. To explain the reallocation pattern and quantify the output and TFP losses of sovereign debt crises, we build a sovereign default model incorporating firm intangible investment. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms shift their resources towards tangibles because they can be used as collateral. Using the estimated model, we find that elevated sovereign risk explains 40% of the observed output losses and 22% of TFP losses during the Italian sovereign debt crisis.

Keywords: Sovereign debt crisis, intangible asset, firm investment, TFP loss

JEL Classification: F34, E22, E44, G12, G15

Suggested Citation

Deng, Minjie and Liu, Chang, Sovereign Risk and Intangible Investment (February 15, 2021). Available at SSRN: https://ssrn.com/abstract=3786951 or http://dx.doi.org/10.2139/ssrn.3786951

Minjie Deng (Contact Author)

Simon Fraser University, Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.minjiedeng.me/

Chang Liu

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

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