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

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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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    References listed on IDEAS

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    4. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    5. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
    6. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    7. Patricia B. Reagan, 1982. "Inventory and Price Behaviour," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 137-142.
    8. Andrew B. Abel, 1985. "Inventories, Stock-Outs and Production Smoothing," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 283-293.
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    Cited by:

    1. Patrick Francois & Huw Lloyd- Ellis, 2005. "I - Q Cycles," Macroeconomics 0511023, EconWPA.

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    Keywords

    Japan ; Business enterprises - Japan;

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