IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2014-088.html

Financial Constraints, Intangible Assets, and Firm Dynamics: Theory and Evidence

Author

Listed:
  • Sophia Chen

Abstract

I study whether firms' reliance on intangible assets is an important determinant of financing constraints. I construct new measures of firm-level physical and intangible assets using accounting information on U.S. public firms. I find that firms with a higher share of intangible assets in total assets start smaller, grow faster, and have higher Tobin’s q. Asset tangibility predicts firm dynamics and Tobin’s q up to 30 years but has diminishing predicative power. I develop a model of endogenous financial constraints in which firm size and value are limited by the enforceability of financial contracts. Asset tangibility matters because physical and intangible assets differ in their residual value when the contract is repudiated. This mechanism is qualitatively important to explain stylized facts of firm dynamics and Tobin’s q.

Suggested Citation

  • Sophia Chen, 2014. "Financial Constraints, Intangible Assets, and Firm Dynamics: Theory and Evidence," IMF Working Papers 2014/088, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2014/088
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=41563
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 285-315.
    2. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-674, August.
    3. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    4. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    5. John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," NBER Working Papers 16300, National Bureau of Economic Research, Inc.
    6. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Fall), pages 20-40.
    7. Andrew Atkeson & Patrick J. Kehoe, 2005. "Modeling and Measuring Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1026-1053, October.
    8. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
    9. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    10. Baruch Lev & Suresh Radhakrishnan, 2005. "The Valuation of Organization Capital," NBER Chapters, in: Measuring Capital in the New Economy, pages 73-110, National Bureau of Economic Research, Inc.
    11. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    12. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    13. Carol Corrado & Charles Hulten & Daniel Sichel, 2009. "Intangible Capital And U.S. Economic Growth," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(3), pages 661-685, September.
    14. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sophia Chen & Estelle P. Dauchy, 2017. "Tax‐Adjusted q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives," Southern Economic Journal, John Wiley & Sons, vol. 83(4), pages 972-992, April.
    2. Nusrat Jahan, 2020. "Does Asset Durability Impede Financing? An Empirical Assessment," Carleton Economic Papers 20-17, Carleton University, Department of Economics, revised 07 Aug 2022.
    3. de Ridder, Maarten, 2016. "Investment in productivity and the long-run effect of financial crises on output," LSE Research Online Documents on Economics 86180, London School of Economics and Political Science, LSE Library.
    4. Richard Fu & Ajay Subramanian & Anand Venkateswaran, 2016. "Project Characteristics, Incentives, and Team Production," Management Science, INFORMS, vol. 62(3), pages 785-801, March.
    5. Yuichi FURUKAWA & Sumiko NIWA, 2021. "Deflation and Declining Business Dynamism in a Cash-in-Advance Economy," Discussion papers 21058, Research Institute of Economy, Trade and Industry (RIETI).
    6. Jose Ignacio Lopez & Virginia Olivella, 2018. "The importance of intangible capital for the transmission of financial shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 223-238, October.
    7. Ch.-M. CHEVALIER, 2018. "Financial constraints of innovative firms and sectoral growth," Documents de Travail de l'Insee - INSEE Working Papers g2018-05, Institut National de la Statistique et des Etudes Economiques.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Establishment Size Dynamics in the Aggregate Economy," American Economic Review, American Economic Association, vol. 97(5), pages 1639-1666, December.
    2. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    3. D'Erasmo, Pablo, 2006. "Investment and firm dynamics," MPRA Paper 3598, University Library of Munich, Germany, revised Apr 2007.
    4. Giorgio Barba Navaretti & Davide Castellani & Fabio Pieri, 2014. "Age and firm growth: evidence from three European countries," Small Business Economics, Springer, vol. 43(4), pages 823-837, December.
    5. Sleuwaegen, Leo & Goedhuys, Micheline, 2002. "Growth of firms in developing countries, evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 68(1), pages 117-135, June.
    6. Huynh, Kim P. & Petrunia, Robert J., 2010. "Age effects, leverage and firm growth," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 1003-1013, May.
    7. Jose Wynne, 2005. "The Value of Information in Credit Markets," 2005 Meeting Papers 228, Society for Economic Dynamics.
    8. Hugo A. Hopenhayn, 2011. "Firm Microstructure and Aggregate Productivity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s1), pages 111-145, August.
    9. Lee, Chang-Yang, 2010. "A theory of firm growth: Learning capability, knowledge threshold, and patterns of growth," Research Policy, Elsevier, vol. 39(2), pages 278-289, March.
    10. repec:eee:labchp:v:3:y:1999:i:pb:p:2711-2805 is not listed on IDEAS
    11. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
    12. Geurts, Karen & Van Biesebroeck, Johannes, 2016. "Firm creation and post-entry dynamics of de novo entrants," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 59-104.
    13. Cefis, Elena & Ciccarelli, Matteo & Orsenigo, Luigi, 2007. "Testing Gibrat's legacy: A Bayesian approach to study the growth of firms," Structural Change and Economic Dynamics, Elsevier, vol. 18(3), pages 348-369, September.
    14. Alexander Coad, 2007. "Firm Growth: A Survey," Papers on Economics and Evolution 2007-03, Philipps University Marburg, Department of Geography.
    15. Galina Vereshchagina & Hugo A. Hopenhayn, 2009. "Risk Taking by Entrepreneurs," American Economic Review, American Economic Association, vol. 99(5), pages 1808-1830, December.
    16. Kim Huynh & David Jacho-Chávez & Robert Petrunia & Marcel Voia, 2015. "A nonparametric analysis of firm size, leverage and labour productivity distribution dynamics," Empirical Economics, Springer, vol. 48(1), pages 337-360, February.
    17. Barseghyan, Levon & DiCecio, Riccardo, 2016. "Externalities, endogenous productivity, and poverty traps," European Economic Review, Elsevier, vol. 85(C), pages 112-126.
    18. Wright, Mark, 2004. "Firm Size Dynamics in the Aggregate Economy," Santa Cruz Department of Economics, Working Paper Series qt4rs4202s, Department of Economics, UC Santa Cruz.
    19. Francesca Lotti & Enrico Santarelli & Marco Vivarelli, 2009. "Defending Gibrat’s Law as a long-run regularity," Small Business Economics, Springer, vol. 32(1), pages 31-44, January.
    20. Brückner, Markus, 2010. "Financial determinants of firm dynamics: Evidence from a European panel," Economics Letters, Elsevier, vol. 107(1), pages 63-65, April.
    21. Michael Anyadike-Danes & Carl-Magnus Bjuggren & Sandra Gottschalk & Werner Hölzl & Dan Johansson & Mika Maliranta & Anja Myrann, 2015. "An international cohort comparison of size effects on job growth," Small Business Economics, Springer, vol. 44(4), pages 821-844, April.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2014/088. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.