Gestation lags for capital, cash flows, and Tobin's Q

Jonathan N. Millar

No 2005-24, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Investment models typically assume that capital becomes productive almost immediately after purchase and that there is no lead time needed to plan. In the case, marginal q is usually sufficient for investment. This paper develops a model of aggregate investment where competitive firms face no adjustment costs other than building and planning delays. In this context, both Tobin's Q and cash flow can be noisy indicators of investment because some shocks fail to outlast the combined gestation lag. The paper demonstrates some empirical facts that challenge prevailing theories of investment but are consistent with gestation requirements. Regressions using aggregate data suggest that it takes at least four quarters for investment to respond to technology shocks and as many as eight additional quarters before productive capacity is affected. Estimates from structural VARs show that only permanent shocks affect investment, but that cash flow and Q react to both permanent and transitory shocks.

Keywords: Capital investments; Econometric models; Tobin's q (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-mac
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Citations: View citations in EconPapers (1)

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