Investmentless Growth: An Empirical Investigation

We analyze private fixed investment in the United States during the past 30 years. We show that investment is weak relative to measures of profitability and valuation—particularly Tobin’sQ—and that this weakness starts in the early 2000s. There are two broad categories of explanations: theories that predict low investmentalong witha lowQ, and theories that predict low investmentdespitea highQ. We argue that the data do not support the first category, so we focus on the second one. We use industry-level and firm-level data to test whether underinvestment relative toQis driven by (i) financial frictions; (ii) changes in the nature or localization of investment, due to the rise of intangibles, globalization, and the like; (iii) decreased competition, due to technology, regulation, or common ownership; or (iv) tightened corporate governance or increased short-termism. We do not find support for theories based on financial frictions. We find some support for globalization and regulation; and we find strong support for the intangibles, competition, and short-termism or corporate governance hypotheses. We estimate that the rise of intangibles explains about one-third of the drop in investment, while concentration and corporate 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 common ownership. These firms return a disproportionate amount of free cash flows to shareholders. Finally, we show that slow-moving changes in competition are difficult to detect in macroeconomic series; standard growth-accounting decompositions confound market power and other medium-run trends, such as falling total factor productivity and labor participation.