Noisy share prices and the Q model of investment

Stephen Roy Bond and Jason Cummins ()

No W01/22, IFS Working Papers from Institute for Fiscal Studies

Abstract: We consider to what extent the empirical failings of the Q model of investment can be attributed to the use of share prices to measure average q. We show that the usual empirical formulation may fail to identify the Q model when stock market valuations deviate from the present value of expected net distributions in ways that are consistent with weak and semi-strong forms of the Efficient Markets Hypothesis. We show that the structural parameters of the Q model can stil be identified in this case using a direct estimate of the firm's fundamental value, and implement this using data on securities analysts' earnings forecasts for a large sample of publicly traded US firms. Our empirical results suggest that stock market valuations deviate significantly from fundamental values. Controlling for this, we find no evidence that the Q model of investment is seriously misspecified.

JEL-codes: D92 E22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2001-09
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Working Paper: Noisy Share Prices and the Q Model of Investment (2000)
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