Do intangible assets support financial leverage? A study on the US public firms

• Main Authors: Park, Duckeun, Leow, Mabel Li Jun, Tan, Yan Qi
• Other Authors: Wu Guiying Laura
• Format: Final Year Project
• Language: English
• Published: Nanyang Technological University 2023
• Subjects: Social sciences::Economic theory
• Online Access: https://hdl.handle.net/10356/166258
• Institution: Nanyang Technological University

This paper analyzes how intangible assets affect a firm's financial leverage by studying the pool of the US publicly listed companies from 2009 to 2021. The article emphasizes the significance of intangible assets in modern businesses, including patents, copyrights, and computer software. By setting the effect of tangible assets on financial leverage as a benchmark, the study seeks to determine relative strength of the intangible assets on supporting debt as collaterals. The Peters & Taylor (2017) technique of estimating intangible assets is used in this study, which draws the sample from 3,416 unbalanced panel data of non-financial US companies listed on stock exchanges between 1975 and 2021. To ensure the reliability of the results, the regression analysis accounts for other determinants of leverage as control variables and provides industry-controlled results using Two-Way Fixed Effects Model (TWFEM). The primary findings of the study show a small, positive and mildly significant effect for intangible assets on financial leverage, as compared to the strongly significant and positive effect of tangible assets. The paper also reveals that such effects of intangible assets have improved significantly for firms with high tangibility in the recent period of 2016-2021 from 2009-2015. To ensure robustness of the regression results, the sensitivity analyses are conducted on the coefficients of the TWFEM to test for potential attenuation bias from measurement errors in intangible asset estimates and survivorship bias from the sample selection. The robustness analysis results suggest that the impact of intangible assets on financial leverage is reasonably robust against the survivorship bias. Despite the measurement errors in intangible asset estimates, financial leverage is still found as significantly supported by the book value of intangible assets, holding other factors constant. Hence, the analysis indicates that the identifiable features of the intangible assets play an important role in supporting the financial leverage. The study concludes that the US listed firms with intangible assets could make more informed financing decisions by understanding the link between intangible assets and financial leverage better, which could also help valuations of businesses with high intangible asset holdings. Therefore, this paper contributes to the growing literature on intangible assets and its significance in financing decisions.