Financing Intangibles

Abstract

This paper uses a large sample of detailed asset valuation data from acquisition transactions to examine how intangible assets influence firms’ debt usage. I find that when the target firm has one dollar more intangible assets, debt financing increases by 24 cents, compared to 43 cents for tangible assets. Debt financing for intangible assets is primarily associated with cash flow-based debt, whereas tangible assets are associated with both asset-based debt and cash flow-based debt. To explore heterogeneity within types of intangible assets, I classify them into demand-shifter and production-based intangibles. Demand-shifter intangibles show a stronger association with debt financing. I propose a theoretical framework suggesting that demand-shifter intangibles reduce cash-flow volatility, and I provide empirical evidence in support of this explanation.

Keywords: Intangible assets, debt financing, M&A

JEL Classification: G32, G34