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Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities?

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  • Dong Lee
  • Han Shin
  • René 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.

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  • Dong Lee & Han Shin & René M. Stulz, 2016. "Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities?," NBER Working Papers 22924, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22924
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    2. Robin Döttling & Tomislav Ladika & Enrico Perotti, 2016. "The (Self-)Funding of Intangibles," Tinbergen Institute Discussion Papers 16-093/IV, Tinbergen Institute.
    3. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    4. John (Jianqiu) Bai & Daniel Carvalho & Gordon M. Phillips, 2018. "The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity," Journal of Finance, American Finance Association, vol. 73(6), pages 2787-2836, December.
    5. Liu, Siqi & Yin, Chao & Zeng, Yeqin, 2021. "Abnormal investment and firm performance," International Review of Financial Analysis, Elsevier, vol. 78(C).
    6. Filippo Di Mauro & Fadi Hassan & Gianmarco I. P. Ottaviano, 2018. "Financial markets and the allocation of capital: the role of productivity," CEP Discussion Papers dp1555, Centre for Economic Performance, LSE.
    7. Cédric Durand & Wiliiam Milberg, 2020. "Intellectual monopoly in global value chains," Review of International Political Economy, Taylor & Francis Journals, vol. 27(2), pages 404-429, March.
    8. Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER Working Papers 23583, National Bureau of Economic Research, Inc.
    9. Ernest Liu & Atif Mian & Amir Sufi, 2022. "Low Interest Rates, Market Power, and Productivity Growth," Econometrica, Econometric Society, vol. 90(1), pages 193-221, January.
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    11. Germán Gutiérrez & Thomas Philippon, 2019. "The Failure of Free Entry," NBER Working Papers 26001, National Bureau of Economic Research, Inc.
    12. Lucia Granelli & Martin Habet & Guergana Stanoeva & Gaetano D’Adamo & Robert Gampfer, 2020. "Puzzles in Non-Financial Corporate Sector Savings across the G20," European Economy - Economic Briefs 063, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Matias Covarrubias & Germán Gutiérrez & Thomas Philippon, 2019. "From Good to Bad Concentration? US Industries over the Past 30 Years," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 1-46, National Bureau of Economic Research, Inc.
    14. Joel Rabinovich, 2022. "The evolving contribution of R&D, advertising and capital expenditures for US-listed firms’ growth in sales, 1979-2018. A quantile regression analysis," Working Papers hal-03539656, HAL.
    15. Peter Spencer & Peter Smith & Paulo Santos Monteiro, 2020. "How to better align the U.K.’s corporate tax structure with national objectives," Discussion Papers 20/02, Department of Economics, University of York.
    16. Jean Luc Gaffard, 2018. "Les réformes structurelles : philosophie sociale et choix politique," Documents de Travail de l'OFCE 2018-15, Observatoire Francais des Conjonctures Economiques (OFCE).
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    19. Perotti, Enrico & Döttling, Robin, 2019. "Redistributive Growth," CEPR Discussion Papers 13984, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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