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Financing intangible capital

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  • Sun, Qi
  • Xiaolan, Mindy Z.

Abstract

Firms finance intangible investment through employee compensation contracts. In a dynamic model in which intangible capital is embodied in a firm’s employees, we analyze the firm’s optimal decisions on intangible capital investment, employee compensation contracts, and financial leverage. Employee financing is achieved by delaying wage payments in the form of future claims. We show that intangible capital investment is highly correlated with employee financing but not with debt issuance or regular equity refinancing. In our quantitative analysis, we show that this new channel of employee financing explains the cross-industry differences in leverage and financing patterns.

Suggested Citation

  • Sun, Qi & Xiaolan, Mindy Z., 2019. "Financing intangible capital," Journal of Financial Economics, Elsevier, vol. 133(3), pages 564-588.
  • Handle: RePEc:eee:jfinec:v:133:y:2019:i:3:p:564-588
    DOI: 10.1016/j.jfineco.2019.04.003
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    References listed on IDEAS

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    Cited by:

    1. Whited, Toni M, 2019. "JFE special issue on labor and finance," Journal of Financial Economics, Elsevier, vol. 133(3), pages 539-540.

    More about this item

    Keywords

    Intangible investment; Limited commitment; Employee financing; Debt capacity;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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