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Tobin's Q and Financial Policy

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Author Info
Robert S. Chirinko

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Abstract

Recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and the need for working with optimizing models. Tobin’s Q model of investment would appear to provide a framework that can satisfy these two criteria. In contrast to the original presentation of the Q model, the formal development has not recognized that the firm actively participates in a number of financial markets; in this broader context, we show that Q is likely to be an uninformative and possibly misleading signal for investment expenditures . We then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with Q models, but the modifications dictated by the theory receive little support from the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2082.

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Date of creation: May 1987
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Publication status: published as From Journal of Monetary Economics, Vol. 19, No. 1, pp. 69-87, (January 1987).
Handle: RePEc:nbr:nberwo:2082

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sargent, Thomas J, 1981. "Interpreting Economic Time Series," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 213-48, April. [Downloadable!] (restricted)
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  2. Mussa, Michael L, 1977. "External and Internal Adjustment Costs and the Theory of Aggregate and Firm Investment," Economica, London School of Economics and Political Science, vol. 44(174), pages 163-78, May. [Downloadable!] (restricted)
  3. Barnea, Amir & Haugen, Robert A & Senbet, Lemma W, 1981. "An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems," Journal of Finance, American Finance Association, vol. 36(3), pages 569-81, June. [Downloadable!] (restricted)
  4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  5. Blanchard, Olivier J. & Wyplosz, Charles, 1981. "An empirical structural model of aggregate demand," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 1-28. [Downloadable!] (restricted)
  6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1, pages 19-46. [Downloadable!] (restricted)
  7. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 67-140. [Downloadable!]
  8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February. [Downloadable!] (restricted)
  9. James M. Poterba & Lawrence H. Summers, 1984. "Dividend Taxes, Corporate Investment, and "Q"," NBER Working Papers 0829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July. [Downloadable!] (restricted)
  11. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Funke & Wolf Maurer & Sikandar Siddiqui & Holger Strulik, 1998. "Investment Under Financial Constraints: Theory and Tests with West German Micro Data," Quantitative Macroeconomics Working Papers 19802, Hamburg University, Department of Economics. [Downloadable!]
  2. Richard W. Kopcke, 1995. "Tobin's q, economic rents, and the optimal stock of capital," Working Papers 95-4, Federal Reserve Bank of Boston. [Downloadable!]
  3. Michael P. O'Malley, 1996. "Tax exhaustion, firm investment, and leasing; a test of the Q model of investment," Finance and Economics Discussion Series 96-31, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty," Studies in Economics 9812, Department of Economics, University of Kent. [Downloadable!]
    Other versions:
  5. Hansen, Sten, 1999. "Agency Costs, Credit Constraints and Corporate Investment," Working Paper Series 79, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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