(ii) changes in the nature and/or localization of investment (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology, regulation or common ownership), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, safe asset scarcity, or regulation. We find some support for globalization; and strong support for the intangibles, competition and short-termism/governance hypotheses. We estimate that the rise of intangibles explains 25-35% of the drop in investment; while Concentration and Governance explain the rest. Industries with more concentration and more common ownership invest less, even after controlling for current market conditions and intangibles. Within each industry year, the investment gap is driven by firms owned by quasi-indexers and located in industries with more concentration and more common ownership. These firms return a disproportionate amount of free cash flows to shareholders.So, more competition leads to more investment, while oligarchy and overlapping boards of directors lead to less investment and the non-retention of earnings.
29 December 2017
Why Don't Firms Invest More?
A new economics paper compares reality with theoretically predicted amounts of private investment in capital and finds that firms invest less than predicted. Then, it tries to determine why this is the case. So, it lists some reasons (I only include the good ones) and then states its conclusion: