Investment Concentration and the Importance of Cash Flow

Capital expenditures by the top 100 firms make up more than 60% of aggregate investment by publicly traded firms and account for most of the variation in aggregate net fixed private nonresidential investment. Surprisingly, these firms have the highest investment-cash flow sensitivity in the economy, despite being the least financially constrained. Further, contrary to the trend among smaller firms, the investment-cash flow sensitivity of the top capital spenders has not disappeared over time. For these firms, we find that cash flows provide better information about future investment opportunities than proxies for Tobin’s q. Our results suggest that inferences based on the average or median public firm may not extend to the firms that drive most of the fluctuations in aggregate investment. JEL classification: G32, G34