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

Fisher College of Business Working Paper No. 2016-03-15

Charles A. Dice Center Working Paper No. 2016-15

55 Pages Posted: 16 Sep 2016 Last revised: 5 Dec 2016

Dong Wook Lee

Korea University Business School

Hyun-Han Shin

Yonsei University

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2016

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 markets, investment, industry, equity flows, debt flows, external finance, equity repurchases, Tobin’s q

JEL Classification: G31, G35, E22, E44, L16

Suggested Citation

Lee, Dong Wook and Shin, Hyun-Han and Stulz, René M., Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities? (December 4, 2016). Fisher College of Business Working Paper No. 2016-03-15; Charles A. Dice Center Working Paper No. 2016-15. Available at SSRN: https://ssrn.com/abstract=2839832

Dong Wook Lee

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

Hyun-Han Shin

Yonsei University ( email )

50 Yonsei Ro
Seodaemoon Gu
Seoul
Korea, Republic of (South Korea)
82-2-21235466 (Phone)

HOME PAGE: http://https://ysb.yonsei.ac.kr/faculty.asp?mid=n02&sOpt=&uid=32

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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