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The Dynamics of Tobin’s q

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Abstract

In this paper I propose a general-equilibrium model with proportional adjustment costs and industry-specific capital to study the firm migration phenomenon across market-to-book ratio. In my model, investors’ desire to diversify their portfolios and investment frictions generate a mean-reverting dynamics of Tobin’s q consistent with the probabilities of migration found in the data, and a nonlinear pattern in the conditional volatility of Tobin’s q. In addition, since firms’ market-to-book ratios are function of the state of the economy and contain information about stock returns, stock prices inherit these properties, yielding asset-pricing implications in line with the empirical evidence, namely the value premium and a non-monotone relationship between the volatility of stock returns and the Tobin’s q.

Suggested Citation

  • Giovanni W. Puopolo, 2011. "The Dynamics of Tobin’s q," CSEF Working Papers 286, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 10 May 2016.
  • Handle: RePEc:sef:csefwp:286
    Note: A previous version of the paper was titled "Firm Migration and Stock Returns".
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    References listed on IDEAS

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    1. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, August.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Dimitris Papanikolaou, 2011. "Investment Shocks and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 639-685.
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    Cited by:

    1. Zolotoy, Leon & O'Sullivan, Don & Chen, Yangyang, 2019. "Local religious norms, corporate social responsibility, and firm value," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 218-233.

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    More about this item

    Keywords

    Tobin’s q; Investment; General equilibrium; Firm migration; Cross-section of returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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