Financing Intangibles

Abstract

This paper utilizes a large sample of detailed assets valuation data from M&A transactions to examine the impact of intangible assets on firms’ capital structure decisions. Contrary to conventional wisdom, the findings reveal that intangibles do not result in lower debt usage compared to tangible assets; instead, intangible assets can support debt financing to a comparable extent, with a greater association with cash flow-based rather than asset-based debt. Furthermore, the research highlights the importance of considering heterogeneity among intangibles, presenting a theoretical framework for categorization. A model is developed to elucidate the mechanism underlying the finding that demand-shifter intangibles exhibit higher debt capacity than production intangibles.

Keywords: Intangible assets, debt financing, capital structure, M&A

JEL Classification: G32, G34