Dr David L. Ikenberry, INSEAD
The rate of capital investment spending by public US corporations has fallen by almost half since the mid-1970s, while both shareholder payouts and cash holdings have been increasing. This is despite the fact that the q ratio, a measure of investment opportunities, has nearly quintupled. We shed light on this puzzle by decomposing q into two components: a valuation factor and an overlooked fundamental factor – asset utilisation. This decomposition plays a critical role in explaining corporate investment. We find that new investment is far more responsive to asset utilisation than to valuation. This finding, combined with a persistent decline in asset utilisation over the last several decades, explains the significant drop in capital spending. Had asset utilisation remained constant at 1970s levels, we estimate corporate investment rates would have instead increased over time. Despite recent concern among policymakers, we find no evidence that shareholder payouts are crowding out investment after controlling for asset utilisation.
