Why Do US Firms Invest Less Over Time?
Abstract
The ratio of capital expenditure to total assets of U.S. firms decreases by more than half from 1980 to 2012. The decline in capital investment is pervasive; it has occurred for firms in most industries and is robust to firms of different sizes, investment opportunities, profitability, accesses to external financing, and expenses on R&D or acquisitions. Existing theories of corporate investment fall short in explaining the decline trend. The decline is also not explained by time variation in firm characteristics, industry composition, and public listing cohorts, or by corporate lifecycle. Our further evidence suggests that it is related to the transition of U.S. economic structure towards more services-oriented production. Over time, firm growth demands less investment in fixed assets and more in intangible assets. Consistent with this change, we find a significant time-series variation of the sensitivity of firm capital expenditure to investment opportunity. International evidence shows that countries with similar economic development to the U.S. (G7 and OECD countries) have also incurred significant declines in capital investment while emerging economies such as BRICS have not. Overall, our study has important implications to the investment theories and suggests a dynamic view of firms’ investment behavior and its determinants.