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Financing Intangible Capital

Author

Listed:
  • Mindy X. Zhang

    (University of Texas at Austin)

  • Qi Sun

    (Shanghai University of Finance and Economics)

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 of intangible investment, employee compensation contracts, and financial leverage. Employee financing is achieved by delaying wage payments in the form of future claims. We document that intangible capital investment is highly correlated with employee financing, but not with debt issuance or regular equity refinancing. In the quantitative analysis, we show that this new channel of employee financing can explain the cross-industry differences in leverage and financing patterns.

Suggested Citation

  • Mindy X. Zhang & Qi Sun, 2016. "Financing Intangible Capital," 2016 Meeting Papers 230, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:230
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    References listed on IDEAS

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    1. Roberto Steri & Lukas Schmid & Boris Nikolov, 2017. "Dynamic Financial Constraints: Which Frictions Matter for Corporate Policies?," 2017 Meeting Papers 630, Society for Economic Dynamics.

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