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Investmentless Growth: An Empirical Investigation

Author

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  • Germán Gutiérrez

    (New York University)

  • Thomas Philippon

    (New York University)

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 or regulation), 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 less entry and more concentration invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasiindexers and located in industries with less entry/more concentration. These firms spend a disproportionate amount of free cash flows buying back their shares.
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Suggested Citation

  • Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    • Handle: RePEc:bin:bpeajo:v:48:y:2017:i:2017-02:p:89-190
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    More about this item

    Keywords

    fixed investment; profitibility; valuation; Tobin's Q; globalization; regulation;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G3 - Financial Economics - - Corporate Finance and Governance

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