Does Capital Flow More to High Tobin's Q Industries?

Abstract

We examine whether capital flows more to high Tobin’s q industries and find that it flows more to high q industries from 1971 until 1996 but not from 1997 to 2014. This change is due to a decrease in the q-sensitivity of equity funding resulting mostly from the increased q-sensitivity of repurchases after 1996. The increase in intangible assets, the aging of American firms, and the impact of the China shock explain much of the change in the q-sensitivity of equity funding and repurchases. The results are robust to how q is estimated and to a non-q measure of growth opportunities.

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

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