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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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    File URL: http://www.csef.it/WP/wp286.pdf
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    Keywords

    Tobin’s q; Investment; General equilibrium; Firm migration; Cross-section of returns;

    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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