Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities?
55 Pages Posted: 16 Sep 2016 Last revised: 5 Dec 2016
Date Written: December 4, 2016
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: Suggested Citation