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Exhuming Q: Market Power Versus Capital Market Imperfections

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  • Joao Ejarque

    (Boston University)

  • Russell Cooper

    (Boston University)

Abstract

Evidence of the statistical significance of profits in Q regressions remains one of the principal findings in the empirical investment literature. This result is taken to support the view that capital market imperfections are an important element for understanding investment. This paper challenges that conclusion. We argue that allowing the profit function at the firm level to be strictly concave, reflecting, for example, market power, is suscent to replicate the Q theory based regression results in which profits are a significant factor influencing investment. To be clear, our ability to replicate the existing results does not require the specification of any capital market imperfections. Thus the friction that explains the statistical significance of profits could be market power by sellers rather than capital market imperfections.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 316.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:316

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Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain
Fax: +34 93 542 17 46
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Web page: http://enginy.upf.es/SCE/
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Cited by:
  1. Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(1), pages 1-32, April.
  2. repec:hal:journl:halshs-00112522 is not listed on IDEAS
  3. Jean-Bernard Chatelain, 2003. "Structural Modelling of Financial Constraints on Investment: Where Do We Stand?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00112522, HAL.

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