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

55 Pages Posted: 12 Dec 2016 Last revised: 20 Feb 2022

See all articles by Dong Wook Lee

Dong Wook Lee

Korea University

Hyun-Han Shin

Yonsei University

René Stulz

Ohio State University (OSU) - Fisher College of Business

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Date Written: December 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.

Suggested Citation

Lee, Dong Wook and Shin, Hyun-Han and Stulz, René, Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities? (December 2016). NBER Working Paper No. w22924, Available at SSRN: https://ssrn.com/abstract=2883961

Dong Wook Lee (Contact Author)

Korea University ( email )

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Korea University Business School
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Korea, Republic of (South Korea)
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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

René Stulz

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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