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The Bond Market's q

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Author Info
Thomas Philippon
Abstract

I propose an implementation of the q-theory of investment using bond prices instead of equity prices. Credit risk makes corporate bond prices sensitive to future asset values, and q can be inferred from bond prices. The bond market's q performs much better than the usual measure in standard investment equations. With aggregate data, the fit is three times better, cash flows are driven out and the implied adjustment costs are reduced by more than an order of magnitude. The new measure also improves firm level investment equations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12462.

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Date of creation: Aug 2006
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Handle: RePEc:nbr:nberwo:12462

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Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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