Investment is shifting from tangible physical assets to intangible goods like software, data, and R&D. This column analyses the impact of this shift on the structure of firm financing. The financial system’s shift from public to private equity is, on the whole, an encouraging reflection of its response to the changing needs of the economy.
“Because the financier risks losing his money to uncertainty, adverse selection, or moral hazard, he hesitates to lend when the financial infrastructure is not adequate to resolve these problems. But he can still protect himself by requiring collateral-valuable assets that the financier can keep in case the borrower defaults.”
Rajan and Zingales (2003).When most people think of investment, what comes to mind is the purchase of new equipment and structures. A restaurant might start with construction, and then fill its new building with tables, chairs, stoves, and the like. This is the world of tangible capital.