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Tobin's Q, economic rents, and the optimal stock of capital

  • Richard W. Kopcke
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    Within optimal investment programs, the accumulation of capital is a stable function of marginal q. Much of the interest in q, however, derives from its potential to reflect the demand for capital when the optimal program changes. If the marginal return on capital diminishes as capital increases, the correspondence between marginal q and the optimal stock of capital can shift whenever investors alter their assessments of prospective economic rents. At such times, marginal q even could rise as the optimal stock of capital falls. In general, robust investment functions express optimal investment in terms of those variables that determine marginal q, rather than marginal q itself. However, under some restrictions (e.g. price-taking enterprises), marginal q may be sufficient to determine the optimal accumulation of capital even as the program changes. The conditions that make marginal q a sufficient statistic also make q a sufficient statistic.

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    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 95-4.

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    Date of creation: 1995
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    Handle: RePEc:fip:fedbwp:95-4
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    1. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-80, December.
    2. Robert S. Chirinko, 1986. "Tobin's Q and Financial Policy," NBER Working Papers 2082, National Bureau of Economic Research, Inc.
    3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
    4. Andrew B. Abel & Janice C. Eberly, 1993. "An Exact Soultion for the Investment and Market Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility," NBER Working Papers 4412, National Bureau of Economic Research, Inc.
    5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    6. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    7. Greenwald, Bruce C. & Kohn, Meir & Stiglitz, Joseph E., 1990. "Financial market imperfections and productivity growth," Journal of Economic Behavior & Organization, Elsevier, vol. 13(3), pages 321-345, June.
    8. Abel, Andrew B, 1985. "A Stochastic Model of Investment, Marginal q and the Market Value of the Firm," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 305-22, June.
    9. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
    10. James M. Poterba & Lawrence H. Summers, 1981. "Dividend Taxes, Corporate Investment, and "Q"," NBER Working Papers 0829, National Bureau of Economic Research, Inc.
    11. James G. Witte & Jr., 1963. "The Microfoundations of the Social Investment Function," Journal of Political Economy, University of Chicago Press, vol. 71, pages 441.
    12. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
    13. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    14. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
    15. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
    16. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
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