We argue that changes in firm governance have contributed to the weakness of corporate investment in recent years. Our initial motivation comes from four trends affecting the US corporate sector during the 2000s:(i) Concentration and profits have increased in most industries (Furman 2015; Grullon, Larkin, and Michaely 2016; Barkai 2017).(ii) Business investment has been weak relative to profitability, funding costs, and market values (Gutierrez and Philippon2017b).(iii) Payout rates of US-incorporated public firms, including buybacks, have increased markedly, as shown in Figure l, panel A.(iv) The fraction of the equity market owned by institutional investors, quasi-indexers in particular, has increased, as shown in Figure 1, panel B.Two main explanations have been proposed for the joint evolution of concentration and investment: intangible capital (Alexander and Eberly2016; Crouzet and Eberly 2018) and increased market power (Gutierrez and Philippon 2017a). These two explanations do not account for the entire investment gap, and we study the role of corporate governance.
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