Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut

Abstract

This paper explores the hypothesis that the rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades. Using a new measure, we show that intangible capital is the most important firm-level determinant of corporate cash holdings and that its importance increases monotonically with firms' financial constraint status and investment inflexibility. On average, our measure accounts for almost as much of the secular increase in cash since the 1970s as all other determinants together. We then develop a new dynamic model of corporate cash holdings with two productive assets, tangible and intangible capital. The interplay of real and financial frictions in the model leads firms with growth options to optimally hold cash in anticipation of (S,s)-type adjustments in physical capital because they want to avoid raising costly external finance. Since only tangible capital can be pledged as collateral, a shift toward intangible capital shrinks the debt capacity of firms and leads them to hold more cash in order to preserve financial flexibility. This mechanism is quantitatively important, as our model predicts an increase in cash holdings in line with the data in response to a realistic increase in intangible capital. We also consider alternative hypotheses, such as declining interest rates and rising equity issuance costs. Overall, our results suggest that technological change has contributed significantly to recent changes in corporate liquidity management.