Working Paper: NBER ID: w22897
Authors: Germn Gutierrez; Thomas Philippon
Abstract: We analyze private fixed investment in the U.S. over the past 30 years. We show that investment is weak relative to measures of profitability and valuation – particularly Tobin’s Q, and that this weakness starts in the early 2000’s. There are two broad categories of explanations: theories that predict low investment because of low Q, and theories that predict low investment despite high Q. We argue that the data does not support the first category, and we focus on the second one. We use industry-level and firm-level data to test whether under-investment relative to Q is driven by (i) financial frictions, (ii) measurement error (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology, regulation or common ownership), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, or safe asset scarcity, and only weak support for regulatory constraints. Globalization and intangibles explain some of the trends at the industry level, but their explanatory power is quantitatively limited. On the other hand, we find fairly strong support for the competition and short-termism/governance hypotheses. Industries with more concentration and more common ownership invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasi-indexers and located in industries with more concentration and more common ownership. These firms spend a disproportionate amount of free cash flows buying back their shares.
Keywords: investment; Tobin's Q; competition; governance; financial frictions
JEL Codes: E22; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high Tobin's Q (G19) | low investment levels (G31) |
| decreased competition (L49) | low investment levels (G31) |
| governance changes (G38) | low investment levels (G31) |
| ownership structure (G32) | investment behavior (G11) |
| tightened governance (G38) | lower investment levels (G31) |
| increased short-termism (G31) | lower investment levels (G31) |
| safe asset scarcity (G19) | disconnect between firm valuation and actual investment behavior (G31) |