Sovereign Risk and Intangible Investment
69 Pages Posted: 22 Mar 2021 Last revised: 14 Feb 2023
Date Written: February 15, 2021
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: Suggested Citation