Process Intangibles and Agency Conflicts

72 Pages Posted: 9 Feb 2023 Last revised: 16 May 2024

See all articles by Hui Chen

Hui Chen

Massachusetts Institute of Technology

Ali Kakhbod

University of California, Berkeley

Maziar Kazemi

Arizona State University (ASU) - Finance Department

Hao Xing

Boston University - Questrom School of Business

Date Written: February 7, 2023

Abstract

We study how process-focused intangible capital affects firm investment and compensation. We document that, in the cross-section, investment and executive compensation are both increasing in process intangibility, defined as the share of process intangibles in total capital stock. To explain these patterns, we build a dynamic agency model with two key ingredients: (i) physical investment and process innovation are complementary in driving the growth of efficiency-adjusted capital; (ii) due to its opaque nature, process innovation is susceptible to moral hazard problems. The model not only accounts for the positive relations between process intangibility, investment, and compensation, but also predicts that the pay-process intangibility association will be stronger among firms with high physical investments. Finally, it implies that pay-equity measures that restrict the compensation of executives and skilled labor, especially those associated with process innovation, could depress investment and reduce firm value.

Keywords: Process Intangibles, Intangible capital, Dynamic contracting, Compensation

JEL Classification: D21, E22, G31, G32, L22, O31, O34

Suggested Citation

Chen, Hui and Kakhbod, Ali and Kazemi, Maziar and Xing, Hao, Process Intangibles and Agency Conflicts (February 7, 2023). MIT Sloan Research Paper No. 6927-23, Available at SSRN: https://ssrn.com/abstract=4351116 or http://dx.doi.org/10.2139/ssrn.4351116

Hui Chen

Massachusetts Institute of Technology ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
+1 (617) 324-3896 (Phone)

Ali Kakhbod

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Maziar Kazemi (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Hao Xing

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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