Investment Financing of Organizational Capital

We identify that the cost of external capital and the frontier technology (FT) shock level are two important factors affecting external capital supply. We explore how they interact to affect the investment financing of organizational capital (OC). We show that the FT shock level has experienced a dramatic change from being counter-cyclical before 1991 to pro-cyclical after 1991. This structural break alters the OC investment sensitivities during the two sub-periods. We find that the OC investment-cash flow sensitivity is low and the OC investment-q sensitivity is high only when the cost of external capital is low and the FT shock level is simultaneously high. These patterns are mainly driven by financially constrained firms. In addition, our empirical findings suggest that OC investments made during recessions when the FT shock level is also low generate higher productivity than in other conditions.