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Q-theory of Investment and Earnings Retentions-Evidence from Scandinavia

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  • Eklund, Johan

    () (Ratio)

Abstract

In a frictionless milieu retentions should have no impact on investment behavior. However, empirical studies typically find that retentions are an important determinant of investment. Managerial discretion and financial constraints are two alternative explanations that have been suggested. This paper uses a panel of listed Scandinavian firms to examine the importance of retentions as a determinant of investment. Measures of Tobin’s Q, marginal q and sales accelerator are used to control for investment opportunities. Scandinavian firms are found to depend on retentions to a high degree, more so than in other developed economies. This high dependence on retentions suggests that the Scandinavian capital markets are suffering from allocational inefficiencies. Moreover, these market frictions appear too large to per se be caused by information asymmetries or managerial discretion phenomena. Possible institutional explanations are suggested.

Suggested Citation

  • Eklund, Johan, 2008. "Q-theory of Investment and Earnings Retentions-Evidence from Scandinavia," Ratio Working Papers 125, The Ratio Institute.
  • Handle: RePEc:hhs:ratioi:0125
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    References listed on IDEAS

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    1. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
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    Cited by:

    1. Andreas Högberg, 2011. "Family Ownership and Regional Economic Development in Asia and Europe," ERSA conference papers ersa10p940, European Regional Science Association.
    2. Iuliia Naidenova & Petr Parshakov & Alexey Chmykhov, 2014. "Soccer Sponsor: Fan Or Businessman?," HSE Working papers WP BRP 28/FE/2014, National Research University Higher School of Economics.
    3. repec:gam:jijfss:v:6:y:2018:i:1:p:11-:d:127786 is not listed on IDEAS

    More about this item

    Keywords

    investment; liquidity; retained earnings; free cash flow; Tobin’s Q; marginal q;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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