The Persistent Effects of Financial Crises on the Composition of Real Investment

Fisher College of Business Working Paper No. 2021-03-19

Charles A. Dice Center Working Paper No. 2021-19

78 Pages Posted: 16 Nov 2021 Last revised: 1 Jun 2022

See all articles by Sheila Jiang

Sheila Jiang

University of Florida - Department of Finance, Insurance and Real Estate

Ye Li

University of Washington - Foster School of Business

Douglas Xu

University of Florida - Warrington College of Business Administration

Date Written: May 30, 2022

Abstract

The new abstract is: Our paper provides the first cross-country evidence on the distinct dynamics of tangible and intangible investments during and after the global financial crisis. The pre-crisis rise of intangible-to-tangible capital ratio was reversed due to a greater decline of intangible investment relative to tangible investment during the crisis and a much slower recovery of intangible investment after the crisis. Tangible capital can be externally financed, and its post-crisis recovery benefits from the restoration of credit supply. In contrast, Intangible investment relies on firms' liquidity holdings that were drawn down in the crisis and can only be rebuilt gradually through retained profits. We provide a unified account of the findings through a dynamic model of corporate investment and liquidity management. Consistent with our model predictions, the divergence between tangible and intangible investments is more prominent in countries with weaker intellectual property protection (less external financing options for intangibles) and riskier government bonds (less robust corporate liquidity holdings).

Keywords: Intangible investment, capital heterogeneity, cash holdings, slow recovery

JEL Classification: E22, E23, E41, E44, G01, G15, G31, G32

Suggested Citation

Jiang, Sheila and Li, Ye and Xu, Douglas, The Persistent Effects of Financial Crises on the Composition of Real Investment (May 30, 2022). Fisher College of Business Working Paper No. 2021-03-19, Charles A. Dice Center Working Paper No. 2021-19, Available at SSRN: https://ssrn.com/abstract=3964839 or http://dx.doi.org/10.2139/ssrn.3964839

Sheila Jiang

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://https://yeli-macrofinance.com/

Douglas Xu

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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