Intangible Investment during Sovereign Debt Crisis: Firm-level Evidence

Abstract

This paper measures the output and TFP costs of sovereign risk by focusing on firm-level investment. Combining Italian firm-level and aggregate-level data, we show that firms reduce their investment and reallocate their resources away from intangible assets and towards tangible assets during the sovereign debt crisis. This asset reallocation is more pronounced among small and high-leverage firms, indicating the role of financial constraints. In our model, sovereign risk deteriorates banks' balance sheets, disrupting banks' ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms internalize that tangibles can be used as collateral while intangibles can not, thus reallocating resources towards tangible investment. In a counterfactual analysis, we find that elevated sovereign risk explains 86% of output losses and 72% of TFP losses during the 2011-2013 Italian sovereign debt crisis.