Intangible Capital and the Choice of External Financing Sources

Using a dataset of Japanese listed firms from 2002 to 2013, we examine how firms' asset structure in terms of the ratio of intangible to tangible capital is related to their choice of financing sources among bank loans, equity issues (seasoned equity offerings: SEO), and bond issues. We further investigate how the choice of financing is related to post-financing investment in tangible and intangible capital. We find that firms with higher intangible capital ratios are more likely to choose equity issuance and less likely to choose loans than bond issues. Using propensity score matching and difference-in-differences approach (PSM-DID), we further find that firms that chose loans invest less in intangible capital than those that did not. Finally, we also obtain results that are consistent with a number of existing theories on capital structure such as the market timing (mispricing) hypothesis on equity issuance, the tradeoff and the pecking order hypotheses on debt and equity, and the holdup hypothesis on bank loans.