A Granular Analysis of Corporate Investment

Abstract

Capital expenditures by the top 100 firms make up more than 60% of aggregate investment by publicly traded firms, and explain most of the variation in aggregate net fixed private non-residential investment. Surprisingly, these firms have the highest investment-cash flow sensitivity in the economy, despite being the least financially constrained. Further, contrary to the trend among smaller firms, the investment-cash flow sensitivity of the top capital spenders has not disappeared over time. For these firms, we find that cash flows provide better information about future investment opportunities than proxies for Tobin’s q. In general, the results from our granular approach indicate that most of the existing evidence based on the behavior of the average firm does not apply to the firms that drive most of the aggregate fluctuations in investment.

Keywords: aggregate investment, financial constraints, investment concentration, q-theory

JEL Classification: G32, G34