What Can We Learn About the Sensitivity of Investment to Stock Prices with a Better Measure of Tobin's q?
AbstractThis paper examines the responsiveness of investment to q (i.e., the ratio of a firm's market value to the replacement cost of its assets) using data on a unique type of firm: Real Estate Investment Trusts (REITs). For REITs, we have high quality estimates of the net asset value of the firm that we use to create relatively accurate measures of Tobin's q. In addition, REITs have institutional features that mitigate some of the complications faced by previous studies. We have three main results. First, there is little evidence of a statistical link between REIT investment and a traditional accounting-based measure of q. Second, REIT investment is highly sensitive to estimates of q that are based on analysts' appraisals of asset value. A REIT whose NAV-based q ratio rises from 1.0 to 1.1 will increase its assets by 4.3 percent in the next year. Third, the difference between the appraisal-based measure of q and the traditional accounting based measure typically increases with the age of the firm's assets and varies across types of properties. These results suggest that measurement error in q can lead to appreciable downward biases in investment sensitivities, even in an industry that seems to meet many of the assumptions in Tobin's original paper, but that Tobin's investment model performs well with a better measure of q.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2003-03.
Date of creation: Jul 2003
Date of revision:
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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.:
- Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999.
"Investment behavior, observable expectations, and internal funds,"
Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.)
1999-27, Board of Governors of the Federal Reserve System (U.S.).
- Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 796-810, June.
- Cummins, Jason & Hassett, Kevin & Oliner, Stephen, 1997. "Investment Behavior, Observable Expectations and Internal Funds," Working Papers, C.V. Starr Center for Applied Economics, New York University 97-30, C.V. Starr Center for Applied Economics, New York University.
- William M. Gentry & Deen Kemsley & Christopher J. Mayer, 2001.
"Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts,"
NBER Working Papers
8486, National Bureau of Economic Research, Inc.
- William M. Getry & Deen Kemsley & Christopher J. Mayer, 2003. "Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts," Journal of Finance, American Finance Association, American Finance Association, vol. 58(1), pages 261-282, 02.
- Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988.
"Financing Constraints and Corporate Investment,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
- Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002.
"When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms,"
Harvard Institute of Economic Research Working Papers
1978, Harvard - Institute of Economic Research.
- Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does The Market Matter? Stock Prices And The Investment Of Equity-Dependent Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(3), pages 969-1005, August.
- Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," NBER Working Papers 8750, National Bureau of Economic Research, Inc.
- Janice C. Eberly & Andrew B. Abel, 2004. "Q Theory Without Adjustment Costs & Cash Flow Effects Without Financing Constraints," 2004 Meeting Papers 205, Society for Economic Dynamics.
- Todd Sinai & Joseph Gyourko, 2000.
"The Asset Price Incidence of Capital Gains Taxes: Evidence from the Taxpayer Relief Act of 1997 and Publicly-Traded Real Estate Firms,"
NBER Working Papers
7893, National Bureau of Economic Research, Inc.
- Sinai, Todd & Gyourko, Joseph, 2004. "The asset price incidence of capital gains taxes: evidence from the Taxpayer Relief Act of 1997 and publicly-traded real estate firms," Journal of Public Economics, Elsevier, Elsevier, vol. 88(7-8), pages 1543-1565, July.
- Todd Sinai & Joseph Gyourko, . "The Asset Price Incidence of Capital Gains Taxes: Evidence from the Taxpayer Relief Act of 1997 and Publicly-Traded Real Estate Firms," Zell/Lurie Center Working Papers, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania 311, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
- Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 51(1-2), pages 233-257.
- Nicolas Kohl & Wolfgang Schaefers, 2012. "Corporate Governance and Market Valuation of Publicly Traded Real Estate Companies: Evidence from Europe," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 44(3), pages 362-393, April.
- William M. Gentry & Charles M. Jones & Christopher J. Mayer, 2004. "Do Stock Prices Really Reflect Fundamental Values? The Case of REITs," NBER Working Papers 10850, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Sheppard).
If references are entirely missing, you can add them using this form.