Investment spending by US public firms is highly concentrated. The 100 largest spenders account for 60% of total capital expenditures and drive most of the variation in aggregate investment. This high concentration creates a disconnect between the average public firm and macroeconomic aggregates. For large firms, cash flow remains the primary driver of investment spending and has not declined in importance as it has for smaller public firms. The cash flowing to big spenders provides a better forecast of future investment opportunities than noisy proxies for Tobin’s q even though these firms are not financially constrained. These results suggest that, at least for the largest spenders, it is unlikely that measurement error drives the significance of cash flow. Our results are also inconsistent with recent models that predict higher investmentcash flow sensitivity for small young growth firms and suggest that cash flow is still the most important determinant of macroeconomic fluctuations in investment spending.

At the aggregate level, firm profitability drives investment spending more than variation in stock market prices, but the opposite is true at the micro level. In the cross section, many studies document the influence of market prices (via Tobin’s q) on investment (e.g., Erickson and Whited (2000), (2012)). However, a host of other studies show the stock market remains a sideshow in explaining aggregate investment (e.g., Blanchard, Rhee, and Summers (1993) and Morck, Shleifer, and Vishny (1990)). In this paper, we offer a straightforward resolution to this puzzle. Contrary to the evidence for the average firm, we show variation in cash flow and not Tobin’s q is highly predictive of future investment for the largest investment spenders. 1 The largest 10% of investment spenders make up 75% of aggregate US investment. Thus, while q predicts the mean firm’s cross-sectional investment, it is cash flow variation that drives large firm investment, and thus US aggregate investment. The fact that investment policy at large firms is so strikingly different from the mean firm’s investment requires some re-thinking of the evidence in Chen and Chen (2012), who argue that the investment-cash flow sensitivity of the average firm has declined markedly over the past 4 decades. In contrast, we show that the marginal effect of cash flow on aggregate investment has actually increased over the last 30 years. In terms of economic magnitude, our results directly contradict the findings in Chen and Chen (2012). Far from being less important, variations in cash flow for the largest spenders are as critical in explaining aggregate investment behavior now as they have ever been.