Working Paper: NBER ID: w22924
Authors: Dong Lee; Han Shin; Ren M. Stulz
Abstract: With functionally efficient capital markets, we expect capital to flow more to the industries with the best growth opportunities. As a result, these industries should invest more and see their assets grow more relative to industries with the worst growth opportunities. We find that industries that receive more funds have a higher industry Tobin’s q until the mid-1990s, but not since then. Since industries with a higher funding rate grow more, there is a negative correlation not only between an industry’s funding rate and industry q but also between capital expenditures and industry q since the mid-1990s. We show that capital no longer flows more to the industries with the best growth opportunities because, since the middle of the 1990s, firms in high q industries increasingly repurchase shares rather than raise more funding from the capital markets.
Keywords: capital allocation; Tobin's q; share repurchases; financial markets; industry growth
JEL Codes: E22; E44; G31; G35; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funding rates (E43) | Tobin's q (G19) |
| High-q firms opting for share repurchases (G34) | Capital allocation (G31) |
| Lack of capital influx into high-q industries (D25) | Negative correlation between funding rates and Tobin's q (E43) |
| Low-funded industries (L89) | Higher Tobin's q (D25) |