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Corporate Policy and Market Value: A q-Theory Approach

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  • Chung, Kee H
  • Wright, Peter

Abstract

In this paper, we show that Tobin's q has a significant predictive power in explaining valuation consequences of major corporate policy variables. Our empirical results reveal that, depending upon whether a firm is overinvesting or underinvesting, financial markets respond quite differently to its capital structure, dividend payout, financial slack, and R&D decisions. Overall, the empirical results suggest that both high debt ratios and greater payouts are favorably viewed by the market when firms are overinvesting. For firms with growth opportunities, however, large debt is unfavorably viewed by the market. In addition, financial slack and R&D expenditures are favorably received by the market for growth firms but not for overinvesting firms. Copyright 1998 by Kluwer Academic Publishers

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  • Chung, Kee H & Wright, Peter, 1998. "Corporate Policy and Market Value: A q-Theory Approach," Review of Quantitative Finance and Accounting, Springer, vol. 11(3), pages 293-310, November.
  • Handle: RePEc:kap:rqfnac:v:11:y:1998:i:3:p:293-310
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    Cited by:

    1. Dirk Czarnitzki & Hanna Hottenrott, 2011. "R&D investment and financing constraints of small and medium-sized firms," Small Business Economics, Springer, vol. 36(1), pages 65-83, January.
    2. Bronwyn Hall, 2004. "The financing of research and development," Chapters,in: Financial Systems, Corporate Investment in Innovation, and Venture Capital, chapter 2 Edward Elgar Publishing.
    3. Peter Wright & Mark Kroll, 2002. "Executive Discretion and Corporate Performance as Determinants of CEO Compensation, Contingent on External Monitoring Activities," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 6(3), pages 189-214, September.
    4. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, Elsevier.
    5. Woo-Jong Lee, 2011. "Managerial entrenchment and the value of dividends," Review of Quantitative Finance and Accounting, Springer, vol. 36(2), pages 297-322, February.

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