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Beyond Q: Estimating Investment Without Asset Prices

Subject

Finance

Publishing details

Social Sciences Research Network

Authors / Editors

Gomes J F;Gala V

Publication Year

2012

Abstract

Empirical corporate finance studies often rely on measures of Tobin's Q to control for "fundamental" determinants of investment. However, since Tobin's Q is a good summary of investment behavior only under very stringent conditions, it is far better to instead use the underlying state variables directly. In this paper we show that under very general assumptions about the nature of technology and markets, these state variables are easily measurable and greatly improve the empirical fit of investment models. Even a general first or second order polynomial that does not rely on additional details about the nature of the investment problem accounts for a substantially larger fraction of the total variation in corporate investment than standard Q measures.

Series

Social Sciences Research Network

Available on ECCH

No


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