Corporate investments: Causes and effects of the U.S. corporate shift from capital expenditures toward R&D
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Why does Tobin's Q have negligible power in predicting capital stock investment? Do the capital market imperfections provide the whole story? Does proxy of Tobin's Q contain information on other investment forms such as R&D and how would this affect capital expenditure sensitivity to Q? Will capital market imperfections have the same effect on capital expenditure vs. R&D? From 1973-2006, average R&D investment by U.S. firms increased from less than 2% to more than 10% of total assets, while average capital expenditures decreased from 8% to 5%. Accompanying these changes, intangible assets (tangible assets) increased from 3% to 30% (decreased from 48% to 28%) of total assets. Despite this shift, the corporate investment literature has continued to focus primarily on capital expenditures. Using Tobin's Q analysis, we find that the shift is value-driven. We also find that all of the following variables affect the sensitivity of capital expenditures to Tobin's Q: (a) industry R&D level; (b) a proxy for the R&D premium; (c) no R&D indicator; (d) the level of intangible assets; and (e) firm-specific R&D level. In addition, the collateral constraint increases capital expenditures, but decreases R&D, at the margin. Finally, we document important differences in the financing of R&D versus capital expenditure investment.