Financing Intangible Capital

Mindy X. Zhang and Qi Sun
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Mindy X. Zhang: University of Texas at Austin
Qi Sun: Shanghai University of Finance and Economics

No 230, 2016 Meeting Papers from Society for Economic Dynamics

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.

Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:230

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