Rising technologies, investment and discount rates

Abstract

This paper examines the recent compositional shift in corporate capital and its impact on investment's sensitivity to funding costs. I show that the rising share of intangibles in U.S firms' assets significantly dampens the stimulus effect of interest rate shocks. For a given surprise change to the fed funds rate, a one standard deviation above the mean in intangible capital intensity mutes investment's response by more than 30%. These results hold in robust specifications, when isolating the pure interest rate effect, and controlling for other known factors such as leverage and firm growth. A number of characteristics of intangible capital can potentially explain the heterogeneous responses: collateral value, adjustment costs, project duration and de- preciation rates. I propose a structural interpretation of the empirical findings in a quantitative general equilibrium model of heterogeneous firms. Under a reasonable calibration, the model's insights indicate that the higher depreciation tax shield from intangible capital investment quantitatively plays the main role in driving the results. I present further empirical evidence for this channel by focusing on negative profit firms.