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A Re-examination of the Q Theory of Investment Using U.S. Firm Data

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  • Schaller, Huntley

Abstract

Investment models based on Tobin's q are theoretically appealing, but they have been an empirical disappointment when applied to aggregate time-series data. This paper explores two potential explanations for the poor empirical performance of q investment models, problems arising from aggregation and imperfect competition. The results suggest that aggregation is responsible for spurious evidence of dynamic misspecification and at least partially responsible for an upward bias in estimated adjustment costs. The evidence also suggests that imperfect competition in output markets may have an effect on the investment behavior of some firms. Copyright 1990 by John Wiley & Sons, Ltd.

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  • Schaller, Huntley, 1990. "A Re-examination of the Q Theory of Investment Using U.S. Firm Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 309-325, Oct.-Dec..
    • Handle: RePEc:jae:japmet:v:5:y:1990:i:4:p:309-25
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    Cited by:

    1. Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
    2. Stepan Bahteev & Sophia Turkanova & Andrey Pushkarev & Oleg Mariev, 2021. "Modelling the influence of Tobin's Q and cash flows on the capital investments of Russian firms," Proceedings of Economics and Finance Conferences 12513370, International Institute of Social and Economic Sciences.
    3. Gallegati, Marco & Ramsey, James B., 2013. "Structural change and phase variation: A re-examination of the q-model using wavelet exploratory analysis," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 60-73.
    4. Emilio Colombo & Luca Stanca, 2003. "Investment Decisions and the Soft Budget Constraint: Evidence from Hungarian Manufacturing Firms," Working Papers 68, University of Milano-Bicocca, Department of Economics, revised Dec 2003.
    5. Tinsley, P A, 2002. "Rational Error Correction," Computational Economics, Springer;Society for Computational Economics, vol. 19(2), pages 197-225, April.
    6. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Asset prices, Credit and Investment in Emerging Markets," NIPE Working Papers 18/2009, NIPE - Universidade do Minho.
    7. Buffie, Edward F., 2014. "The Taylor principle fights back, Part II," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 30-49.
    8. Janz, Norbert, 1997. "Robust GMM Estimation of an Euler Equation Investment Model with German Firm Level Panel Data," ZEW Discussion Papers 97-05, ZEW - Leibniz Centre for European Economic Research.
    9. Samuel, Cherian, 1996. "Stock market and investment : the signaling role of the market," Policy Research Working Paper Series 1612, The World Bank.
    10. Chen, Hong-Yi & Lee, Alice C. & Lee, Cheng-Few, 2015. "Alternative errors-in-variables models and their applications in finance research," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 213-227.
    11. Huntley Schaller, 2010. "Investment, Taxes and the Cost of Capital: An Euler Equation Specification Test," American Journal of Economics and Business Administration, Science Publications, vol. 2(3), pages 210-220, September.
    12. Marina Riem, 2016. "Corporate investment decisions under political uncertainty," ifo Working Paper Series 221, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Pratap, Sangeeta, 2003. "Do adjustment costs explain investment-cash flow insensitivity?," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 1993-2006, September.
    14. repec:dgr:rugsom:99e07 is not listed on IDEAS
    15. Karen Mills & Steven Morling & Warren Tease, 1994. "The Influence of Financial Factors on Corporate Investment," RBA Research Discussion Papers rdp9402, Reserve Bank of Australia.
    16. Joseph P. Ogden & Shanhong Wu, 2015. "Corporate Investment: Empirical Evidence for Alternative Propensities," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 1-21, November.
    17. Demers, Fanny S. & Demers, Michel & Schaller, Huntley, 1994. "Irreversible investment and costs of adjustment," CEPREMAP Working Papers (Couverture Orange) 9416, CEPREMAP.
    18. Cuthbertson, K. & Gasparro, D., 1995. "Fixed investment decisions in UK manufacturing: The importance of Tobin's Q, output and debt," European Economic Review, Elsevier, vol. 39(5), pages 919-941, May.
    19. Hong Bo, 1999. "The Q theory of investment: does uncertainty matter," Research Report 99E07, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    20. Chen, Shaw & Chowdhury, Gopa, 1995. "Companies' investment decisions in the NICS--evidence from Taiwan and South Korea," International Review of Economics & Finance, Elsevier, vol. 4(3), pages 283-298.
    21. Casalin, Fabrizio & Dia, Enzo, 2014. "Adjustment costs, financial frictions and aggregate investment," Journal of Economics and Business, Elsevier, vol. 75(C), pages 60-79.

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