Hui-Min Chung, Department of Information Management and Finance, National Yang Ming Chiao Tung University / Sustainability Leadership Research Center
Jun-Mao Chiu, Department of Finance, National Sun Yat-sen University Yi-Hua Li, Department of Finance, Chung Yuan Christian University
Chun-Min Hung, Department of Information Management and Finance, National Yang Ming Chiao Tung University
1. Purpose and Objective
In recent years, studies have pointed out that intangible assets play an important role in the growth of the national economy and enterprises (Corrado, Hulten, and Sichel, 2009;
Dell’Ariccia, Kadyrzhanova, Minoiu, and Ratnovski, 2020). In particular, intangible assets are crucial for company growth (Dou, Ji, Reibstein, and Wu, 2021). According to Lev and Radhakrishnan (2003), intangible assets can divide into the following four categories: (1) The discovery and learning of intangible assets, which mainly concerns the technology, knowledge, and patents discovered during the research and development process; (2) intangible assets related to customers, such as brands, trademarks or unique consumer channels; (3) human resources, such as salary systems and employee training systems that can increase employee productivity and reduce employee turnover; and (4) organization capital, which is a special structure, organization, and management method that enables the company to maintain its competitiveness.
Organization capital is an intangible asset that plays an important role in a company's output and profitability. Prescott and Visscher (1980) believe that organization capital is the accumulation of key resources and skills, which enables companies to improve production efficiency. Evenson and Westphal (1995) point out that organization capital is a kind of knowledge that can combine human technology and physical assets to produce products that meet consumer expectations. Eisfeldt and Papanikolaou (2013) further indicate that organization capital is included in the company’s key technologies and talents such as managers, engineers, and researchers. To sum up, organization capital involves areas including business management, organizational structure, and even organizational culture and human technology. Organizational capital not only can improve the production efficiency and output of a company, but can also help the company become competitive.
Moreover, organization capital can reflect both the manager's ability and operating quality. On the other hand, managers also play an important role in organization capital investment decision-making. For instance, Lev, Radhakrishnan, and Zhang (2009) point out that managers' compensation can reflect managers' ability, which in turn will stimulate the firm's investment in organization capital.
Furthermore, when banks evaluate corporate loan contracting, financial performance is a key evaluation criterion and the manager’s ability is an important factor in the company’s financial investment decision-making efficiency (De Franco, Hope, and Lu, 2017). However, previous studies seldom explore the relationship between organization capital, managerial abilities, and bank loan spreads.
This paper focuses on organization capital in intangible assets and explores whether companies' investments in intangible assets will affect bank loan spreads. We further verify how managerial capability affects the relationship between organization capital and bank loan spreads.
2. Literature and Hypotheses
Corrado et al. (2009) pointed out that organization capital accounts for approximately 30% of intangible assets, which shows the importance of organization capital in intangible assets and corporate competitive advantages.
Past literature on bank lending mention that banks will use the strategy of “information monopoly” while sign loan contracts with borrowers. Banks will provide different lending costs to each company based on different levels of company performances. (Houston and James, 1996; Santos and Winton, 2008; Hale and Santos, 2009; Schenone, 2010). In other words, “information monopoly” is one of the reasons that lending costs varies between companies. On the other hand, Sharpe (1990) and Rajan (1992) both indicate that banks set the interest rate for borrowing by collecting or exchanging information from borrowers.
In addition, there is a general consensus that banks will provide more valuable or better-performing companies with lower lending costs.
Based on these preceding studies, we posit that companies investing more organization capital can create better operating performances and corporate value. Banks in turn will provide these better-performing companies with lower lending costs. We thus construct hypothesis 1 as follows.
Hypothesis 1: If the company invests more organization capital, the bank will provide lower bank loan spreads.
Lev et al. (2009) find that companies with higher managerial capabilities will try to use corporate resources more efficiently by investing more organization capital, thereby improving the company’s output and performance. To test the relationships among managerial ability, organization capital and bank loan spreads, we construct hypothesis 2 as follows.
Hypothesis 2: Companies with higher managerial abilities will significantly reduce bank loan spreads when their investments in organization capital increase.
3. Research Design
3.1 Sample Resource
This paper utilizes the data of US-listed companies from 1985 to 2016 and explores how organization capital affects the lending variables of bank spreads and noninterest spreads. We obtain the variables of bank lending characteristics from the Dealscan database. And following Demerjian, Lev, and McVay (2012), we apply the data envelopment analysis method to measure the ability of managers.
Regarding the measurement of organization capital, past studies mostly use Selling, General, and Administrative (SG&A) to quantify organization capital (Lev and Radhakrishnan, 2005; Lev et al., 2009). Traditionally, SG&A expenses are defined as all commercial expenses during the operation of a company to maintain business benefits.
These expenses do not include those directly related to product production. A large part of SG&A costs includes information systems, construction and staff training, which is in line with the uniqueness of organization capital and the characteristics of a company’s key talent.
More recently, Eisfeldt and Papanikolaou (2013) go further and consider the impact of inflation on SG&A costs and thus estimate organization capital by considering the accumulation of SG&A costs in the consumer price index. In this paper, we choose to measure the organization capital by applying the method from Eisfeldt and Papanikolaou (2013). The calculation method is as follows:
OCi,t = (1 ‒ δ0 ) × OCi,t-1 +
SG&A
i,tCPI
t ,where OCi,t represents the organization capital of the ith company in year t; δ0 is the depreciation rate of organization capital set to 15%, mainly referring to the estimate of the depreciation rate of R&D capital in 2006 by the Bureau of Economic Analysis (BEA);
and CPIt is the US Consumer Price Index in year t. We use the variable of Adjusted Organization Capital (ADJOC), which is calculated by a company’s organization capital minus the median organization capital of the company’s industry, to avoid the influence of industry effects on results. The industry classification is mainly based on Fama and French practices, which divide the company’s industries into 48 categories (Fama and French, 1997).
3.2 Models
This research first explores the impact of organization capital on bank lending spreads and establishes a regression model using the ordinary least squares method. The equation to examine hypothesis 1 is as follows:
Log (AISD)
i,j,t=
α + β
1ADJOC
i,t-1 + β2Firm characterisics
i,t-1 +β
3Loan characterisitics
i,j,t + Loan_typei + Loan_ purposei + Yeart +Industry
i + εi,j,t ,where Log (AISD)i,j,t is the natural logarithm of the all-in spread drawn, represented as a dependent variable for bank lending spreads. ADJOC is the ith company’s organization capital in year t-1, which could eliminate endogeneity problems. Following Graham, Li, and Qiu (2008), we control firm characteristics, loan characteristics, loan type dummy variables, and loan purpose dummy variables. We also control Year dummy variables (Year) and Industry dummy variables (Industry) in this model.
Furthermore, in hypothesis 2, we take the variable of Managerial Ability (MA) into consideration to examine how it affects the relationship between organization capital and bank lending spreads. Based on the model built in hypothesis 1, we consider the variable of Managerial Ability (MA) into the model of hypothesis 1 to examine the interaction effect between organization capital and managerial ability on bank lending spreads.
4. Empirical Findings and Contributions
First, our empirical results indicate that higher organization capital can reduce bank loan spreads. Second, when taking managerial abilities into consideration, we find that companies with better managerial abilities and thus invest more organization capital will also reduce bank loan spreads. Besides, we also perform many robustness tests to examine the influence of organization capital on bank lending costs. The research results still have consistency and support both hypotheses.
This paper have two contributions. One of the contribution in this paper, we fills the research gaps on the impact of organization capital on enhancing the efficiency of corporate operations. The literature in recent years pointed out that organizational capital in a company affects corporate M&A performance and post-merger operational performance (Li, Qiu, and Shen, 2018), the difference in stock returns between companies (Eisfeldt and Papanikolaou, 2013), and the sensitivity of investment and cash flow (Atting and Cleary, 2014) and operational performance (Lev et al., 2009). Our empirical results show that if the firm with higher organization capital could reduce the bank loan cost. The main reason is that the investment of organizational capital can bring value creation effects to the company, so banks are willing to provide lower lending costs for companies that invest more organization capital.
The second contribution of this research is to supplement the literature on explaining how the managerial abilities affect the relation between organization capital and bank loan spreads. In the past literature, the determinants of bank lending spreads mainly focused on company characteristics and manager characteristics, such as: financial restatement (Graham et al., 2008), earnings forecast (Hasan, Park, and Wu, 2012), stock liquidity (Francis, Hasan, Mani, and Yan, 2016), family ownership (Yen, Lin, Chen, and Huang, 2015), corporate political relevance (Chen, Shen, and Lin, 2014), manager overconfidence (Lin, Chen, Ho, and Yen, 2020), and manager ability (Bui, Chen, Hasan, and Lin, 2018;
De Franco et al., 2017). The above-mentioned literature neglects to discuss how the managerial ability affects the investment of intangible assets and bank loans at the same time. The results of this research found that the better the managerial capabilities of the company, and the company invests more organizational capital, the bank will reduce the bank lending spreads.
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