The Puzzling Convergence of Intangible Investments

Motivated by the rising prominence of intangibles, this paper explores whether there are common forces that drive intangible investments in the U.S. and the Euro area, in tandem with firm-specific characteristics. If such forces exist, there should be groups of firms (convergent clubs) for which the time-varying cross-sectional variance of intangible investments (scaled by total assets) declines over time. The empirical results indicate that there is a big convergent club in both economic areas, the sectoral composition of which is similar to that of the entire sample, an indication that the common forces are economy-wide and not sector-specific. Moreover, the country composition of the big club in the Euro area is also similar to that of the entire sample, an indication that they are not country-specific either. More puzzling, the evidence of common forces is stronger for the Euro area countries, despite their differing overall economic and financial-market conditions, and that their bank-based financial systems are less likely to finance intangible assets than the U.S. market-based one. The paper also used probit analysis to identify the common forces; but this analysis did not yield any firm results. Nevertheless, the main finding of the paper, itself a novel contribution to the rapidly growing literature on intangibles, suggests another angle to re-examine the existing empirical literature and identifies potential misspecification problems of related microeconomic studies. As such, it should be of interest to researchers, market participants, and to standard-setters and policymakers who base their decisions on empirical studies.