DP12618 The (Self-) Funding of Intangibles
We model how technological change leads to a shift in corporate investment towards intangible capital, and test its implications for corporate financial policy. While tangible assets can be purchased and funded externally, most intangible capital is created by skilled
workers investing their human capital, so it requires lower upfront outlays. Indeed, U.S. high-intangibles firms have larger free cash flows and lower total investment spending, and
do not appear more financially constrained. We model and test how these firms optimally
retain cash for both a precautionary as well as a retention motive. The optimal reward for risk-averse human capital involves deferred compensation and a commitment to retain cash.
High-intangibles firms also should favor a payout policy of repurchases over dividends to avoid penalizing unvested claims. Our empirical evidence supports these predictions.