Specific Capital and the Rise in Tobin’s Q ∗ Boyan Jovanovic † and Peter L. Rousseau ‡ January 31, 2003 Abstract Over the last century Tobin’s Q has tripled. Yet growth has not accelerated. The likely explanation is therefore one of rent re-distribution towards the share- holder rather than the growth of intangibles. We argue that this redistribution has occurred because capital has become more firm-specific. 1 Introduction Tobin’s Q has tripled over the last 100 years. This has been a century-long trend, and not just a “new-economy” phenomenon. One possible explanation is growth in the quantity of unmeasured capital — “intangibles” — as Hall (2000, 2001), Laitner and Stolyarov (2002), and others have argued. What is more likely, however, is that the shareholder now extracts a larger fraction of the rents from labor and capital. We argue this is because human and physical capital have become more firm-specific. The following three facts support this view: 1. Productivity has not risen by nearly as much as a rise in the quantity of “intangi- bles” should have produced. Our model, in contrast, easily generates permanent rises in stock prices and Tobin’s Q’s, and permanent drops in productivity. 2. The share of output retained by the firm has nearly doubled since 1920. 3. Labor turnover has declined by a factor of three or four over the century, and especially in the very sectors where Q has grown the most. Firm-specific capital inhibits labor turnover. Most of this specificity is present in a company’s in- fancy, i.e., at its IPO. Tobin’s Q’s of IPO-ing firms are, as we shall show, a little higher than the Q’s of older firms. This contradicts the view that specificity is created by firms investing in it — if it were, incumbents’ Q’s would exceed those of the IPO-ing firms. ∗ We thank A. Hortacsu, R. Lucas, and D. Neal for helpful comments. † NYU and the U. of Chicago ‡ Vanderbilt university 1