RESEARCH
RESEARCH
“Impact of Intangible Capital on Firm Borrowing Constraints” (with Marko Melolinna and Maren Froemel) - new draft out soon
Intangible assets have become increasingly important in modern economies. Does the rising share of intangibles leave firms with less loan collateral, hence tightening firm borrowing constraints? We study the impact of intangible capital on firm borrowing, and propose a novel way of identifying credit constraints in the debt market. Our empirical strategy builds on a theoretical framework combining a standard asset-based lending contract with a no-arbitrage condition on firm debt. The model predicts that the sensitivity of the firm interest rate spread to the firm capital-to-debt ratio should be decreasing in firm intangible intensity, if intangibles are more difficult to pledge as collateral. Intuitively, increasing the capital-to-debt ratio relaxes the borrowing constraint less for firms whose capital is more intangible, if lenders are less able to liquidate intangible assets. Using a large sample of UK firms, we estimate the structural parameters governing the pledgeability of intangible and tangible capital. The results suggest that the collateral value of intangibles is significantly lower than the collateral value of tangible assets, consistent with the view that it is harder for firms to borrow against intangible capital.
“Financial Constraints and Misallocation in the Intangible Economy”, new draft out soon
Investment in intangible assets has increased steadily over the last few decades. What impact does the low collateral value of intangibles have on aggregate productivity and resource allocation? I construct a model with heterogeneous firms facing financial constraints and using tangible and intangible capital in production. In addition to reducing investment and employment, the low collateral value of intangibles amplifies opposing mechanisms that have previously been overlooked. On the one hand, the financing friction reduces productivity by limiting default and exit of less productive firms. On the other hand, the presence of intangibles leads to a tighter connection between firm financing costs and productivity. Whilst unproductive firms can mitigate the impact of higher default risk by borrowing against tangible capital, intangibles do not offer the same protection. This leads to a novel mechanism whereby financing frictions can increase productivity by directing resources towards more productive firms. Quantitatively, the former effect dominates and financial constraints have a negative impact on the economy – much larger than when intangibles are ignored.
“Financial frictions and firms’ capital composition: a structural estimation of firms’ borrowing constraints for the UK” (with Marko Melolinna and Maren Froemel)
Bank of England Staff Working Paper No. 1,132 , June 2025
Is it more challenging to obtain external debt financing for firms with more intangible assets? We analyse how intangible capital matters for firm-level financial frictions in the debt market and propose a novel strategy to identify them. Our empirical strategy builds on a theoretical framework and combines a standard collateral constraint with a no-arbitrage condition on firm debt. Specifically, the model predicts that the sensitivity of the firm interest rate spread to the firm capital-to-debt ratio should be decreasing in firm intangible intensity if intangibles are less effective in mitigating financial frictions. Intuitively, increasing the capital-to-debt ratio has a smaller effect on the interest rate spread for firms with more intangible assets, if the liquidation recovery value of intangible assets lower relative to that of tangible assets. Using a large panel of UK firms, we estimate the structural parameters of firms’ collateral constraint conditional on their capital composition. We find that interest rate spreads are indeed less sensitive to changes in the capital-to-debt ratio for firms with higher intangible intensity. Furthermore, a higher tangible stock lowers the firm interest rate spread, whilst a higher intangible capital stock is associated with a higher spread. Our findings are robust to controls for debt maturity and other firm characteristics commonly associated with financing frictions.
“Explaining Patterns in Gross Capital Flows”, First draft 2018, revised 2025
This paper examines the ability of frictionless open economy models to generate empirically consistent patterns in gross capital flows. A simple model with two assets and two countries is used to evaluate patterns in gross capital flows triggered by shocks to the endowment. In contrast to predictions in the literature, the simple model is able to produce responses in capital flows that are consistent with empirical evidence. This is because standard shocks change hedging properties of assets, causing optimal adjustments in the portfolios of domestic and foreign investors.
“The Impact of R&D Expenditure on the Costs of Renewable Energy”, 2016
This paper estimates the impact of public R&D expenditure on the costs of renewable energy, and discusses the use of these results in energy policy evaluation. Estimates are obtained by applying a model specification identified in the literature on a panel data set of 18 countries. I conclude that a 10% increase in the R&D based “knowledge stock” variable leads to a 3.3% and 5.7% reduction in the costs of wind and solar power, respectively. I show that large scale policy initiatives, such as “Mission Innovation” proposed at the 2015 UN Climate Conference in Paris, can lead to sizeable reductions in the costs of renewables.
“Intangible Investment and Cash-Flow Based Borrowing Constraints”
Cash-flow based lending accounts for a large share of total corporate debt in many advanced economies. Can firms finance intangible investment through cash-flow based borrowing contracts, mitigating the need for collateral? I develop a theoretical framework in which cash-flow based contracts arise endogenously as a way for lenders to guarantee a low risk of loan default. The framework results in testable predictions regarding differences in the investment – cash-flow sensitivity for intangible and tangible intensive firms, that shed light on the relative ease at which intangible investment can be financed through cash-flow based contracts.
“Trends in Productivity Growth and Allocative Efficiency: a Production Function Approach”
Is the productivity slowdown in advanced economies driven by lower within-firm productivity growth, or a reduction in the contribution of improvements in allocative efficiency? I estimate production functions for US public companies, and find that both components play a role. However, the decline in the improvement in allocative efficiency is more pronounced, and more consistent over the years. I investigate the extent to which accounting for intangible capital can help explain the trends. Allowing for intangible capital as an input in the firm production function results in an even more pronounced decline in productivity growth and declining growth in allocative efficiency.
“20 years after the Asian Financial Crisis” with Vatcharin Sirimaneetham, World Economic Situation and Prospects 2018, United Nations (page 120)