Intangible Capital and Corporate Cash Holdings: Theory and Evidence

Abstract

The rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades. We construct a new measure of intangible capital and show that intangible capital is the most important firm-level determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other standard determinants together. We then develop a new model of corporate cash holdings that introduces intangible capital into an otherwise standard dynamic corporate finance setup. Our model generates cash holdings that are up to an order of magnitude higher than the standard benchmark and in line with their empirical averages for the last two decades. Overall, these results suggest that technological change has contributed significantly to recent changes in corporate liquidity management.