Discussion paper

DP11673 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 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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Citation

Philippon, T and G Gutierrez (2016), ‘DP11673 Investment-less Growth: An Empirical Investigation‘, CEPR Discussion Paper No. 11673. CEPR Press, Paris & London. https://cepr.org/publications/dp11673