Why Does Equity Capital Flow out of High Tobin’s $boldsymbol{q}$ Industries?

Abstract

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 proxy for rents than investment opportunities, have become more important within industries. For these firms, repurchases but not capital expenditures increase in the cross-section with q ⁠ , so that q explains the variation of repurchases more than of capital expenditures. Consequently, equity capital flows out of high q industries because for these industries stock repurchases are high and issuances are low.