The Persistent Effects of Financial Crises on the Composition of Real Investment

Sheila Jiang, Ye Li and Douglas Xu
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Sheila Jiang: University of Florida
Ye Li: Ohio State University
Douglas Xu: University of Chicago

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Our paper provides the first cross-country evidence on the distinct dynamics of tangible and intangible investments during and after the global financial crisis. The pre-crisis rise of intangible-to-tangible capital ratio was reversed outside the U.S. due to a greater decline of intangible investment and a much slower recovery. Tangible capital can be externally financed, and its post-crisis recovery benefits from the restoration of credit supply. In contrast, Intangible investment relies on firms’ liquidity holdings that were drawn down in the crisis and can only be rebuilt gradually through retained profits. We provide a unified account of the findings through a dynamic model of corporate investment and liquidity management. Consistent with our model predictions, the divergence between tangible and intangible investments is more prominent in countries with weaker intellectual property protection (less external financing options for intangibles) and riskier government bonds (less robust corporate liquidity holdings).

JEL-codes: E22 E23 E41 E44 G01 G15 G31 G32 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fdg and nep-mac
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https://dx.doi.org/10.2139/ssrn.3964839

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2021-19

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