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The Bond Market's q

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  • 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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Publication status: published as Philippon, Thomas. "The bond market’s Q," Quarterly Journal of Economics, August 2009.
Handle: RePEc:nbr:nberwo:12462

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