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

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