Financial Constraints, Intangible Assets, and Firm Dynamics: Theory and Evidence

 
Author/Editor: Sophia Chen
 
Publication Date: May 14, 2014
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: I study whether firms' reliance on intangible assets is an important determinant of financing constraints. I construct new measures of firm-level physical and intangible assets using accounting information on U.S. public firms. I find that firms with a higher share of intangible assets in total assets start smaller, grow faster, and have higher Tobin’s q. Asset tangibility predicts firm dynamics and Tobin’s q up to 30 years but has diminishing predicative power. I develop a model of endogenous financial constraints in which firm size and value are limited by the enforceability of financial contracts. Asset tangibility matters because physical and intangible assets differ in their residual value when the contract is repudiated. This mechanism is qualitatively important to explain stylized facts of firm dynamics and Tobin’s q.
 
Series: Working Paper No. 14/88
Subject(s): Intangible capital | Corporate finance | Corporate investment | Commercial borrowing | Assets | Depreciation | Debt financing | Contracts/Agreements/Leases | Econometric models

 
English
Publication Date: May 14, 2014
ISBN/ISSN: 9781484393741/1018-5941 Format: Paper
Stock No: WPIEA2014088 Pages: 38
Price:
US$18.00 (Academic Rate:
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