Abstract
We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less.
Highlights
Technological progress and the transition to a service economy have increased the importance of corporate intangible assets
Our headline result is that intangible investment responds less to monetary policy compared to tangible investment
Consistent with the stock market results, intangible investment responds less to monetary policy compared to tangible investment, and the total investment in firms with more intangible assets responds less to monetary policy
Summary
Technological progress and the transition to a service economy have increased the importance of corporate intangible assets. Same interest rate changes imply proportionately smaller changes to their user cost of capital (Crouzet and Eberly, 2019) Consistent with this channel, we document that the weaker stock price and investment response to monetary policy in firms with intangible assets is more pronounced among firms with a wider gap between tangible and intangible asset depreciation rates. This literature documents that investment responds to monetary policy more in financially constrained firms, across a variety of proxies of financial constraints: firm size (Kashyap et al, 1994; Gertler and Gilchrist, 1994; Kashyap and Stein, 1995), age (Cloyne et al, 2018), cash and leverage (Jeenas, 2018b), and distance to default (Ottonello and Winberry, 2018) We contribute to this literature by documenting a novel source of heterogeneity in investment response, namely that between tangible and intangible investment, controlling for all traditional proxies of firm financial constraints. This paper proceeds as follows: Section 2 describes the data, Section 3 documents the headline results, Section 4 presents evidence on the credit, depreciation, and adjustment cost channels, and Section 5 concludes
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