What do frictions mean for Q-theory testing?
This paper develops and empirically tests a model designed to distinguish the role of real and financing frictions on firms investment, debt financing and equity financing policies. Real frictions include fixed costs of investment and adjustment costs. Financing frictions include taxes, collateral constraints, flotation costs of equity and dividend constraints. Because of financing frictions, all corporate policies are interrelated and depend on average Q. Due to fixed costs of investment and binding financing constraints,the sensitivity of corporate policies to Q is non-linear. The empirical tests demonstrate that both the endogeneity and non-linearities created by real and financing frictions are economically significant. The paper provides a rationale for the documented poor performance of Q-theory in explaining investment, and for the differential performance of the neoclassical investment model in explaining investment and stock returns. The paper extends Q-theory to explain debt and equity issues, and shows that market to book sorts control for non-linearities in investment policies.
When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0847. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.