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

IMF Working Papers, May 14, 2014

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

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Bibliographic details

• Authors: Sophia Chen
• Published: May 14, 2014
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484393741.001

Summary and key findings

• The study investigates whether firms' reliance on intangible assets is an important determinant of financing constraints.
• New measures of firm-level physical and intangible assets are constructed using accounting information on U.S. public firms.
• Empirical findings:
  • Firms with a higher share of intangible assets in total assets start smaller.
  • Firms with a higher share of intangible assets in total assets grow faster.
  • Firms with a higher share of intangible assets in total assets have higher Tobin’s q.
  • Asset tangibility predicts firm dynamics and Tobin’s q up to 30 years but has diminishing predicative power.

Methodology and measures

• Construction of new measures of physical and intangible assets at the firm level using accounting information on U.S. public firms.
• Empirical analysis links the share of intangible assets in total assets to firm entry size, growth rates, and market valuation (Tobin’s q).

Theoretical model and mechanism

• A model of endogenous financial constraints is developed in which firm size and value are limited by the enforceability of financial contracts.
• The core mechanism: asset tangibility matters because physical and intangible assets differ in their residual value when the contract is repudiated.
• The mechanism is described as qualitatively important to explain stylized facts of firm dynamics and Tobin’s q.

Subject coverage and keywords

• Subjects: Aging, Asset and liability management, Asset valuation, Economic theory, Financial frictions, Financial institutions, Population and demographics, Stocks, Technology
• Keywords: Aging, and administrative, asset tangibility, Asset valuation, entrant firm, Financial constraints, Financial frictions, firm dynamics, general, intangible assets, market value, production parameter, selling, share of intangible assets, Stocks, Tobin’s q, WP

Content in this bundle

• 1. Estimated Physical Depreciation Rate
  • 1. Estimated Physical Depreciation Rate (Markdown version)
  • 1. Estimated Physical Depreciation Rate (PDF)