The Impact of Intangible Assets on Financial and Governance Policies: A Simultaneous Equation Analysis

Using two UK cross-sectional samples, this paper examines the impact of the level and the type of the intangible assets on six major financial and governance policies that directly depend on the interactions between managers, shareholders and debt holders – financial structure, dividend pay-outs, external ownership concentration, managerial share ownership, board of directors’ structure and auditing demand. The results suggest that the level and type of intangible assets (measured by the amount of all intangible assets, the stock of RD expenditures and the amount of intangible assets other than RD) fail to have a significant impact on the four governance policies investigated in this paper – managerial equity ownership, external block ownership, board structure and auditing demand. In contrast, it is found that intangible assets (measured by those three variables) have significant negative impact on debt and dividend payout. From a theoretical point of view, these results suggest that the accumulated amount of high agency costs of debt, bankruptcy costs, information asymmetry and non-debt tax shields associated with intangible/RD assets are cancelled out by important equity agency costs and signalling arguments for all four governance policies but not for the two financial policies.