Wang, Yicheng, Debt Market Friction, Knowledge Capital Accumulation and Macroeconomic Implications (May 17, 2014). Available at SSRN: http://ssrn.com/abstract=2438330

“This paper studies accumulation of firm-specific knowledge capital with the presence of debt market frictions at individual firm level and explores its macroeconomic implications in the aggregate. We propose a new mechanism and a quantitative model to explain the puzzling yet stylized fact that knowledge capital is negatively correlated with debt at the firm level. The model has two key features, both of which consistent with empirical facts, to deliver the core mechanism: (1) R{\&}D investment and hence knowledge capital accumulation within the firm is very persistent and smooth and this feature is achieved in the model naturally and endogenously. (2) Firm-specific knowledge capital cannot be used as collateral in the debt market borrowing and only some fraction of physical capital can. The implication, essentially, is that R{\&}D intensive firms have stronger demand for fund to finance investment and labor hiring, however, their firm-specific knowledge capital cannot help lift borrowing limit. Therefore, those firms have relatively stronger precautionary saving motives and lower leverages. We calibrate and test the model using detailed firm level data (Compustat) and several independent data sets (LBD, CPS). The model is quantitatively successful along a wide variety of dimensions. What we can learn from this model? Based on the quantitative model, we study the implications of two industrial policies related to R{\&}D investment. We do not recommend the policy to encourage using intellectual property as collateral for bank loans, and we recommend the policy of tax credit for R&D investment. In fact, we find the tax credit policy can increase output by more than 3% in the long run. Also the model provides an interpretation for industry level data regarding different patterns of knowledge capital and debt. Finally, we use the model to shed light on the recent financial crisis and the 2008 great recession.”