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Financing intangible capital

Qi Sun and Mindy Z. Xiaolan

Journal of Financial Economics, 2019, vol. 132, issue 2, 472-496

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

Keywords: Intangible investment; Limited commitment; Employee financing; Debt capacity (search for similar items in EconPapers)
JEL-codes: G32 G35 E22 (search for similar items in EconPapers)
Date: 2019
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