Essays on Investment Dynamics under Market Imperfections

Abstract

Chapter 1 highlights a source of financial frictions associated with intangible assets. I construct new measures of firm-level intangible and physical assets using accounting information on U.S. public firms. I find that firms with a higher initial share of intangible assets (i) start smaller, (ii) grow faster, and (iii) have higher market value per unit of total assets. Intangible share predicts firm dynamics for up to 40 years but its predictive power diminishes over time. I develop a model with heterogeneous firms and financial frictions in which firm size and growth are limited by the enforceability of financial contracts. The share of intangible assets matters because physical and intangible assets differ in their residual value for the firm when the financial contract is repudiated. In the model, firms whose production technology depends more heavily on intangible assets face tighter borrowing limits and take a longer time to mature. The model can quantitatively reproduce key empirical facts on firm dynamics and quantify financial frictions associated with physical and intangible assets. Chapter 2 provides a framework to disentangle embodied and disembodied progresses. Intuitively, a faster rate of embodied progress reduces the service life of capital goods and discourages continued investment in old vintages. I propose to use data on capital service life and investment allocation to indirectly inform the rate of investment-specific technological change. The model features a nontrivial allocation of investment across capital vintages and endogenous capital service lives. Aggregate demand growth provides an incentive to expand production with old capital, yet modern sectors drive up labor costs and induce old-fashioned firms to exit. The endogenous exit decision determines the economic service life of capital. In Chapter 3, we propose a model with physical and intangible assets and estimate it with a self-collected comprehensive database. Under standard assumptions, physical investment depends on its after-tax cost and the tax-adjusted q. Conventional models provide biased estimates because they ignore intangibles. We estimate our model using several episodes of temporary investment tax incentives in the early 2000s. The impact of the equipment and structure tax terms are generally significantly larger than conventional estimates.