The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms
We derive from a model of investment with multiple capital goods 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 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 which is the error term in the growth-Q equation. For early years of our sample. cash flow has significant explanatory power over and above Q. The significance of cash flow disappears for more recent years for the heavy industry when Japanese capital markets was liberalized. The estimated Q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost.
|Date of creation:||Apr 1990|
|Date of revision:|
|Publication status:||published as Econometrica, Vol. 59, No. 3, May 1991, pp. 731-753.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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