Identifiable Intangible Assets and Capital Structure

• In Event: Banking, Working Capital, and Financial Structure

Abstract

We investigate the relation between intangible assets and capital structure. Although internally-generated intangible assets are significant value drivers in an increasingly knowledge-based economy, accounting rules do not record them on balance sheets. Yet, Statement of Financial Accounting Standards 141 requires an acquirer to value a target’s identifiable intangible assets, including internally-generated, in its allocation of the purchase price and disclose the valuations in financial reports. Acquirers base these disclosures on arm’s length transactions, a unique source of fair value estimates of a broad set of identifiable intangible assets. We find a strong positive relation between these identifiable intangible assets and financial leverage. Our estimates suggest that the identifiable intangible assets support debt financing and expand credit capacity as much as tangible assets do, in particular in the absence of sufficient tangible assets. These results contribute to the scant literature on the use of fair value accounting information relating to intangible assets in credit markets.

Authors

• Steve C Lim, Texas Christian University

• Antonio J Macias, Baylor University

• Thomas Moellert, Texas Christian University