The Persistent Decline in Asset Utilization and the Investment-q Paradox

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Despite Tobin’s q nearly doubling since the mid-1970s, the rate of corporate investment has fallen dramatically. We shed light on this paradox by decomposing q into three components relating to valuation, profitability, and asset utilization. This decomposition reveals that investment is remarkably responsive to asset utilization, more so than to valuation or profitability. This finding, combined with a pervasive and persistent decline in asset utilization over time, explains the significant drop in investment spending. Consistent with the idea that managers may be treating the stock market as more of a sideshow, we find that the impact of the valuation component of q on investment is rather modest. These empirical findings are extremely robust and hold across all G7 countries. Finally, we use this decomposition methodology to reexamine the debate around stock buybacks and find no evidence that these corporate payouts crowd out investment.

Joint paper with David L. Ikenberry.