Why Does Equity Capital Flow out of High Tobin's q Industries?

The Review of Financial Studies, Volume 34, Issue 4, April 2021

Dong Wook Lee, Area Chair, Korea University Business School

Hyun-Han Shin, Yonsie University – Department of Finance

René M. Stulz, The Ohio State University – Department of Finance

High Tobin's q industries receive more funding from capital markets than low Tobin's q industries from 1971 to 1996. Since then, the opposite is true. The key to understanding this shift is that large firms, for which q is more a proxyfor rents than investment opportunities, have bcome more important within industries. For these firms, repurchases but not capital expenditres increase in the cross-section with q, so that q explains the variation of repurchases more than of capital expenditures. Consquently, equity capital flows out of high q industries because for these industries stock repurcahses are high and issuances are low.

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