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The relationship of firm growth and Q with multiple capital goods: theory and evidence from panel data on Japanese firms

Author

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  • Fumio Hayashi
  • Tohru Inoue

Abstract

We develop a Q model of investment with multiple capital goods that delivers a one-to-one relation between the growth rate of the capital aggregate and the stock market-based Q. We estimate the growth-Q relation using a panel of over six hundred Japanese manufacturing firms taking into account the endogeneity of Q. Identification is achieved by combining the theoretical structure of the Q model and an assumed serial correlation structure of the technology shock that comprises the error term in the growth-Q relation. The Q variable is significantly related to firm growth. Much, but not all, of the apparent explanatory power of cash flow disappears if its endogeneity is corrected for. The estimated Q coefficient is not implausibly small if the growth rate of the capital aggregate contains measurement error.

Suggested Citation

  • Fumio Hayashi & Tohru Inoue, 1989. "The relationship of firm growth and Q with multiple capital goods: theory and evidence from panel data on Japanese firms," Discussion Paper / Institute for Empirical Macroeconomics 13, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmem:13
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    Cited by:

    1. Patrick Francois & Huw Lloyd- Ellis, 2005. "I - Q Cycles," Macroeconomics 0511023, University Library of Munich, Germany.

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    Keywords

    Japan ; Business enterprises - Japan;

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