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The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms

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  • Fumio Hayashi
  • Tohru Inoue

Abstract

We derive from a model of investment with multiple capital goods a one-to-one relation between the growth rate of the capital aggregate and the stock market-based Q. We estimate the growth-Q relation using a panel of Japanese manufacturing firms taking into account the endogeneity of Q. Identification is achieved by combining the theoretical structure of the Q model and an assumed serial correlation structure of the technology shock which is the error term in the growth-Q equation. For early years of our sample. cash flow has significant explanatory power over and above Q. The significance of cash flow disappears for more recent years for the heavy industry when Japanese capital markets was liberalized. The estimated Q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3326.

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Date of creation: Apr 1990
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Publication status: published as Econometrica, Vol. 59, No. 3, May 1991, pp. 731-753.
Handle: RePEc:nbr:nberwo:3326

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  1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Working Papers 3079, National Bureau of Economic Research, Inc.
  2. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  3. Epstein, Larry G, 1983. " Aggregating Quasi-Fixed Factors," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(2), pages 191-205.
  4. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Bank monitoring and investment: evidence from the changing structure of Japanese corporate banking relations," Finance and Economics Discussion Series 86, Board of Governors of the Federal Reserve System (U.S.).
  5. Fumio Hayashi, 1991. "Taxes and Corporate Investment in Japanese Manufacturing," NBER Chapters, in: Productivity Growth in Japan and the United States, pages 295-316 National Bureau of Economic Research, Inc.
  6. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
  7. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  8. Schiantarelli, F. & Georgoutsos, D., 1990. "Monopolistic competition and the Q theory of investment," European Economic Review, Elsevier, vol. 34(5), pages 1061-1078, July.
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