Investment-Less Growth: An Empirical Investigation

67 Pages Posted: 5 Dec 2016 Last revised: 1 Jan 2019

See all articles by German Gutierrez Gallardo

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: December 2016

Abstract

We analyze private fixed investment in the U.S. over the past 30 years. We show that investment is weak relative to measures of profitability and valuation – particularly Tobin’s Q, and that this weakness starts in the early 2000’s. There are two broad categories of explanations: theories that predict low investment because of low Q, and theories that predict low investment despite high Q. We argue that the data does not support the first category, and we focus on the second one. We use industry-level and firm-level data to test whether under-investment relative to Q is driven by (i) financial frictions, (ii) measurement error (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology, regulation or common ownership), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, or safe asset scarcity, and only weak support for regulatory constraints. Globalization and intangibles explain some of the trends at the industry level, but their explanatory power is quantitatively limited. On the other hand, we find fairly strong support for the competition and short-termism/governance hypotheses. Industries with more concentration and more common ownership invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasi-indexers and located in industries with more concentration and more common ownership. These firms spend a disproportionate amount of free cash flows buying back their shares.

Suggested Citation

Gutierrez Gallardo, German and Philippon, Thomas, Investment-Less Growth: An Empirical Investigation (December 2016). NBER Working Paper No. w22897, Available at SSRN: https://ssrn.com/abstract=2880335

German Gutierrez Gallardo (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Students ( email )

NY
United States

Thomas Philippon

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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