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

77 Pages Posted: 16 Nov 2021 Last revised: 18 Nov 2021

See all articles by Sheila Jiang

Sheila Jiang

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

Ye Li

Ohio State University (OSU)

Douglas Xu

University of Chicago; University of Chicago - Booth School of Business

Date Written: November 14, 2021

Abstract

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 outside the U.S. due to a greater decline of intangible investment and a much slower recovery. 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 (November 14, 2021). 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)

Ohio State University (OSU) ( email )

Blankenship Hall-2010
901 Woody Hayes Drive
Columbus, OH OH 43210
United States

Douglas Xu

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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