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The investment puzzle

In a new paper, Rene Stulz of Ohio State University points out an oddity here - that it is firms with the highest stock market valuations that are most loath to invest. He shows that firms with the highest Tobin’s q (the ratio of share prices to the replacement cost of capital) tend to buy back shares rather than invest.

This is a relatively new phenomenon: in the 70s and 80s, the more highly valued firms did indeed invest more than cheaper ones.

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