Why do U.S. firms invest less over time?
Also presented at China International Conference in Finance 2015, July 9-12
Capital expenditures of U.S. public firms, relative to total assets, decrease by more than a half from 1980 to 2012. The decline is pervasive across industries and firms of different characteristics. The decline is not explained by time variation in industry composition in the economy, firms’ changing investment opportunities or financial conditions, corporate lifecycle, or public listing cohorts. It is related to the widespread transformation of production technology – firms rely more on intangible capital instead of fixed assets in production over the past three decades. As a result, the sensitivity of capital expenditure to investment opportunities decreases. Our examination of the international data suggests that economic globalization also facilitates the transformation of production technology. Our findings reflect a shift in the relative importance of physical and intangible capital in firm production and have important implications for how we think about and measure corporate investment.