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Exhuming Q: Market Power vs. Capital Market Imperfections

  • Russell Cooper
  • Joao Ejarque

Evidence of the statistical significance of profits in Q regressions remains one of the principal findings in the empirical investment literature. This result is frequently taken to support the view that capital market imperfections are an important element for understanding investment. This paper challenges that conclusion. We argue that allowing the profit function at the firm level to be strictly concave, reflecting, for example, market power, is sucent to replicate the Q theory based regression results in which profits are a significant factor determining investment. To be clear, our ability to replicate the existing results does not require the specification of any capital market imperfections. Thus the friction that explains the statistical significance of profits could be market power by sellers rather than capital market imperfections.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8182.

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Date of creation: Mar 2001
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Handle: RePEc:nbr:nberwo:8182
Note: EFG
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