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Policy Uncertainty and Corporate Investment
Using a news-based index of policy uncertainty, we document a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence that the relation between policy uncertainty and capital investment is not uniform in the cross-section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms that are more dependent on government spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility.
Journal Article
Growing Like China
We construct a growth model consistent with China's economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial firms use more productive technologies, but due to financial imperfections they must finance investments through internal savings. State-owned firms have low productivity but survive because of better access to credit markets. High-productivity firms outgrow low-productivity firms if entrepreneurs have sufficiently high savings. The downsizing of financially integrated firms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China's economic transition.
Journal Article
Investmentless Growth
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.
Journal Article
Returns to Capital in Microenterprises: Evidence from a Field Experiment
We use randomized grants to generate shocks to capital stock for a set of Sri Lankan microenterprises. We find the average real return to capital in these enterprises is 4.6%-5.3% per year), substantially higher than market interest rates. We then examine the heterogeneity of treatment effects. Returns are found to vary with entrepreneurial ability and with household wealth, but not to vary with measures of risk aversion or uncertainty. Treatment impacts are also significantly larger for enterprises owned by males; indeed, we find no positive return in enterprises owned by females.
Journal Article
The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage
We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst.
Journal Article