Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities? / Dong Lee, Han Shin, René M. Stulz.

Format:

Book

Author/Creator:

Lee, Dong.

Contributor:

National Bureau of Economic Research.

Shin, Han.

Stulz, René M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22924.

NBER working paper series no. w22924

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

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.

Notes:

Print version record

December 2016.