NBER WORKING PAPER SERIES INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

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 quasi-indexers and located in industries with less entry/more concentration. These firms spend a disproportionate amount of free cash flows buying back their shares. Germán Gutiérrez NYU Stern School of Business 44 West 4th Street, KMC 9-190 New York, NY 10012 ggutierr@stern.nyu.edu Thomas Philippon New York University Stern School of Business 44 West 4th Street, Suite 9-190 New York, NY 10012-1126 and NBER tphilipp@stern.nyu.edu In his March 2016 letter to the executives of S&P 500 firms, BlackRock’s CEO Laurence Fink argues that, “in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” The decline in investment has been discussed in policy papers [Furman, 2015], especially in the context of a perceived decrease in competition in the goods market [CEA, 2016]. There is little systematic evidence, however, on the extent of the investment puzzle and on the potential explanations. This paper tries to (at least partially) fill that gap. We clarify some of the theory and the empirical evidence; and test whether alternate theories of under-investment are supported by the data. The main contributions of the paper are to show that: (i) the lack of investment represents a reluctance to invest despite high Tobin’s Q; and (ii) this investment wedge appears to be linked to decreased competition and changes in governance that encourage shares buyback instead of investment. We address the issues of causality of competition and governance in a companion paper [Gutiérrez and Philippon, 2016]. It is useful, as a starting point, to distinguish two broad categories of explanations for low investment rates: theories that predict low investment because they predict low Tobin’s Q and theories that predict low investment despite high Tobin’s Q. The first category includes theories of increased risk aversion or decreases in expected growth. The standard Q-equation holds in these theories, so the only way they can explain low investment is by predicting low values of Q. The second category ranges from credit constraints to oligopolistic competition, and predicts a gap between Q and investment due to differences between average and marginal Q (e.g., market power, growth options) and/or differences between firm value and the manager’s objective function (e.g., governance, short-termism). We find that private fixed investment is weak relative to measures of profitability and valuation – particularly Tobin’s Q. Time effects from industryand firm-level panel regressions on Q are substantially lower since 2000. This is true controlling for firm age, size, and profitability; focusing on subsets of industries; and even considering tangible and intangible investment separately. Given these results, we discard theories that predict low investment because they predict low Q. We therefore focus on theories that predict a gap between Q and investment; and we consider the following eight potential explanations, grouped into four broad categories. See Section 2 for a detailed discussion of these hypotheses. • Financial frictions