Working Paper: CEPR ID: DP12618
Authors: Robin Dottling; Tomislav Ladika; Enrico Perotti
Abstract: We model how technological change leads to a shift in corporate investment towards intangible capital, and test its implications for corporate financial policy. While tangible assets can be purchased and funded externally, most intangible capital is created by skilledworkers investing their human capital, so it requires lower upfront outlays. Indeed, U.S. high-intangibles firms have larger free cash flows and lower total investment spending, anddo not appear more financially constrained. We model and test how these firms optimallyretain cash for both a precautionary as well as a retention motive. The optimal reward for risk-averse human capital involves deferred compensation and a commitment to retain cash.High-intangibles firms also should favor a payout policy of repurchases over dividends to avoid penalizing unvested claims. Our empirical evidence supports these predictions.
Keywords: Technological Change; Intangible Assets; Cash Holdings; Human Capital; Corporate Leverage; Equity Grants; Deferred Equity; Share Vesting
JEL Codes: G32; G35; J24; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in intangible capital (E22) | Changes in corporate financial behavior (G32) |
| Hint firms (Y60) | Lower investment spending (G31) |
| Hint firms (Y60) | Retain cash for precautionary and retention motives (D14) |
| Investment strategy in intangible assets (O34) | Optimal reward for risk-averse human capital (D29) |
| More intangibles (E22) | Favor share repurchases over dividends (G35) |
| Hint firms do not appear to be more financially constrained than lint firms (D20) | Hint firms can cover their investment outlays more easily (G31) |
| Technological change (O33) | Shift in corporate investment towards intangible capital (E22) |
| Hint firms (Y60) | Larger free cash flows (D25) |