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Excess Capacity, Marginal q, and Corporate Investment

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  • GUSTAVO GRULLON
  • DAVID L. IKENBERRY

Abstract

Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.

Suggested Citation

  • Gustavo Grullon & David L. Ikenberry, 2025. "Excess Capacity, Marginal q, and Corporate Investment," Journal of Finance, American Finance Association, vol. 80(3), pages 1533-1592, June.
    • Handle: RePEc:bla:jfinan:v:80:y:2025:i:3:p:1533-1592
    DOI: 10.1111/jofi.13439
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