Traders work in a booth on the floor of the New York Stock Exchange.

Is everything alright with the state of business investment in the United States? Weak investment growth in the years since the Great Recession—both here and abroad—raises questions. Is it because expected growth is low and investment will pick up once overall economic growth does? (This is the so called “accelerator” view of what determines business investment.) Yet weak growth predates the Great Recession, when expectations of growth were higher and amid a period of high profits—a sign that investment should have been booming. Is something else going on? A new paper argues that the increased concentration of companies and changes to corporate governance are behind more than a decade of “investment-less growth,” a threat not just to short-term growth but long-term prosperity as well.

The paper, released as a National Bureau of Economic Research working paper last week, is by economists German Gutierrez and Thomas Philippon of New York University. The two authors try to uncover why business investment, measured as a share of a firm’s operating returns, has been so lackluster since the turn of the 21st century. Gutierrez and Philippon try to understand the change in this behavior by using a model of investment called “Tobin’s Q.”

Briefly, Tobin’s Q tries to understand how companies change their investments based on the ratio of an individual company’s market value to the cost of buying all the capital stock of that company, with this ratio being called “Q.” If Q is higher than 1 then the market thinks the firm is worth more than its constituent parts, implying the company should invest more. If Q is less than 1 then it implies the market doesn’t think the firm is worth the capital investment put into it and should shrink.

The Q for overall business investment in the United States is, on average, signaling that business investment should be much higher than it has been so far this century. Gutierrez and Philippon show that investment has been weak since 2000 and note the trend can’t be explained by higher rates of depreciation as they haven’t increased much since 2000.  The authors then go through several hypotheses for their breakdown of trends that may be contributing to higher Q ratios, using data on investments from the Federal Reserve’s Flow of Funds data and the Compustat dataset of public corporations. They don’t find any evidence that firms lack of access financing is prohibiting them from using their profits to invest, though they do find some evidence that Q is higher because of the greater economic importance of “intangible assets” such as intellectual property.

But the biggest explanatory factors—accounting for roughly 80 percent of the difference between actual business investment and predicted investment—is the increasing concentration of companies within industries and increased “common ownership” of companies by large investment firms. These “commonly owned” companies not only don’t invest as much as we might expect given their Qs but instead use these their funds to finance share buybacks and other shareholder payouts. The high profitability of these companies isn’t reinvested in these firms but instead flows to predominantly wealthy shareholders.

If this research holds up, then policymakers will need to question whether institutional financial factors are holding back higher and more productive business investment. If Gutierrez and Philippon are right, higher overall economic growth doesn’t necessarily lead to more business investment. Their results also indicate that letting firms gain access to overseas profits at a low tax rate for investment in the United States wouldn’t boost investment, but instead shareholders’ bank accounts. Of course, previous experience shows that as well.

Policymakers interested in boosting business investment growth should perhaps spend less time focusing on taxes and more time on the increasing concentration of businesses within industries.